Ideas: Is China a good investor?

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This article first appeared in Forum, The Edge Malaysia Weekly, on April 3 - 9, 2017.

 

Two years ago, Andrew Nathan, Professor of Political Science at Columbia University, published a paper in which he noted that analysts are wondering about “the extent to which China, as its power grows, will seek to remake the world in its authoritarian image”. Many have tried to answer the question. The new wave of global expansion by China is attracting a lot of interest from analysts and observers.

In Malaysia and many other Asean countries, China’s increasing reach has become more visible, to the extent that we cannot possibly pretend that it is still business as usual.

It is certainly not. For decades, economic relationships and investments have been bundled with the promotion of liberal democracy and the liberalisation of trade. But China, being a communist country that does not practise liberal democracy, may be less concerned about good governance, let alone democratisation. As countries become less dependent on Western sources of funds, will they also feel less pressure to pursue integrity and the rule of law?

We are already seeing a semblance of this new normal in Malaysia. Let me give just one example.

The East Coast Rail Line (ECRL) is being sold to us as a game changer. We have been told that RM55 billion is being “invested” in this project and that it will greatly benefit everyone in the country.

But this picture is a great simplification of the story. The ECRL is funded by a loan from China’s state-owned Exim Bank, and the Malaysian government acts as the guarantor. We do not have to pay back the loan in the first seven years, but after that, we will have to settle it within 20 years.

It does not matter whether the ECRL is profitable or not. We still have to repay the loan. The risk and liability are completely on the shoulders of Malaysian taxpayers and zero on China. So, is this an investment or is it just a loan where we bear all the risks?

The deal is very good for China. It came with the understanding that the Malaysian government will contract out the job to another Chinese state-owned enterprise — China Communications Construction Co Ltd (CCCC). There are conditions that they must subcontract work to local companies but they will remain as the tier one contractor.

That means we are borrowing money from China in order to pay a Chinese company to do the job, and after seven years, we still need to pay back the loan plus interest, again, to China. Not only does China get back its money immediately in the form of payment for the work done by CCCC, it will get more money from us when we repay the loan. We have to shoulder all the risks while China gets guaranteed profits.

The contract was given to CCCC through direct negotiation. This is despite the fact that we have local companies that have delivered rail projects before. This is a clear sign that good governance is on the wane. But, even if we really want to forgo an open tender, wouldn’t it be better to give the project to a local company?

The commercial viability of the project has also been questioned. The forecast is that the ECRL, despite running through the less industrialised parts of Malaysia, will carry almost 60 million tonnes of freight per annum by 2035. This is amazing because even KTM Bhd, which has rail networks in the more industrialised and densely populated west coast of the peninsula, carries only about six million tonnes of freight per annum! If we fail to achieve this projected freight tonnage, will the project still be financially feasible or will taxpayers have to pay a huge subsidy for the ECRL?

Frankly, I find it difficult to understand this projection. But whoever conducted the feasibility study must have done a very convincing job because he or she has persuaded the government to completely change tack. For decades, Malaysia has been investing mainly in highways, but now, it is making a massive shift to interstate rail. Towns and cities are also better connected with more flights operated by more airlines.

Having said that, it is not my intention to focus only on the ECRL — the limited space here restricts me to giving just one example. I am fully aware that this will create an impression that I am focusing on just the ECRL. I am not and I apologise if it creates that impression.

My focus is on the neglect of good governance and transparency that has arrived with China’s money. This is what worries me because the authoritarian Chinese regime is unlikely to tie its money to a rules-based, competitive and transparent economic system. The above is just one example we are seeing today. The Chinese clearly did not say “take this loan, call for an international tender and make all studies available to the public so that Malaysian taxpayers are guaranteed best value for the money”.

Back in 2011, academician Evelyn Goh wrote a working paper for Singapore’s S Rajaratnam School of International Studies. Contrary to the usual coupling of economic growth with political freedom, she explained that there is an “alternative path of maintaining a capitalist economy without concomitant political liberalisation”. She added that now, countries “look to China as an important model for authoritarian capitalism”.

Authoritarian capitalism scares me — the creation of economic wealth and the distribution of that wealth to the population so that they are pacified and do not demand for more political freedom, thereby strengthening a one-party rule. I don’t think we want that even if it is deployed in neighbouring countries.

Additionally, the rise of China is interesting to me because even I have experienced the impact. This article was initially submitted to another English newspaper, but they rejected it. I don’t think their refusal is because of my using the ECRL as an example because just a few weeks ago, the same newspaper also declined to publish my earlier article that commented on China’s interference in Malaysia’s domestic politics. The common feature of both articles are my comments on China.

I hasten to add that I fully accept the editorial decisions of that newspaper. As the CEO of IDEAS, I too reserve the right to decide what to publish under our banner. So, this is normal practice and I respect their call. Let us not question that.

I am just saying that this is a very interesting case study — how and if China’s soft power is already influencing the behaviour of the nation.

As we welcome foreign investments into the country, including from China, we should also carefully study and manage the possible implications for our budding liberal democracy.


Wan Saiful Wan Jan is CEO of the Institute for Democracy and Economic Affairs