Will China get a slice of KL-Singapore HSR project?

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MALAYSIAN Prime Minister Datuk Seri Najib Razak had the privilege of being the first head of government to meet China’s top two leaders on the sidelines of the 21-nation Apec (Asia Pacific Economic Cooperation) Summit last Monday.

Najib’s meetings with President Xi Jinping and Premier Li Keqiang — for the second time this year — were held even before Xi met Japanese Prime Minister Shinzo Abe and US President Barack Obama, among other world leaders.

This red carpet reception extended to Najib was highlighted by China’s official media Xinhua News Agency, which quoted Xi as describing Malaysia as a qin mi (intimate) friend and a trustworthy regional partner. “China and Malaysia should strengthen cooperation in infrastructure, connectivity and financing and promote the bilateral comprehensive strategic partnership,” he said.

Xi commended Malaysia’s gentle diplomacy in handling the territorial dispute in the South China Sea, saying that was more fruitful than being confrontational.

But amid the diplomatic pleasantries, Malaysia was given a strong message: China wants a slice of the RM40 billion Kuala Lumpur-Singapore high-speed rail (HSR) project targeted to start next year and be completed by 2020.

“Li said China is willing to actively participate in the railway construction in Malaysia [at the meeting with Najib],” reported Xinhua News Agency (English) with photos of the two meetings displayed prominently on its website.

Li also vigorously promoted to Najib China’s ability to build trains and networks, said the Chinese language version of Xinhua News.

China has also pledged financing for the project.

Understandably, there was no official reply from Najib because the governments of Malaysia and Singapore have yet to ink an agreement on the project.

Issues such as financing and governance of the 330km railway will have to be ironed out by both governments before a tender can be called.

The lobby by China came close on the heels of Japan, which has accelerated efforts to promote its rail technology.

Abe had pitched Japan’s bullet train technology when he met Najib in Tokyo in May and last month, Transport Minister Akihiro Ota held talks with his Malaysian counterpart Datuk Seri Liow Tiong Lai and offered Malaysia a technology and financial package.

At the corporate level, local and foreign firms have started forming consortiums to bid for the project next year: MMC Corp Bhd is reportedly teaming up with Gamuda Bhd and Chinese and European system integrators; YTL Corp Bhd is said to be in talks with Siemens AG; UEM Group Bhd is seen working with Ara Group and Spain’s Talgo; and Global Rail Sdn Bhd is believed to be talking to Canada’s Bombardier Inc and China Railway Group.

Recently, Japan’s Sumitomo Corp indicated its interest in the construction of the railway.  

But while Japan and the West can claim they are ahead of China in building bullet trains globally, China has built more extensive high-speed rail systems at home.

Since 2007, it has launched seven high-speed rail systems in various parts of the mainland, rolling out 7,000 miles of track. More are being planned to connect cities in the country.

“If there are no local political and external interferences, the chances of China winning the KL-Singapore rail job are high. It has cost-effectiveness and diplomatic advantage,” Datuk Bong Hon Liong, president of the Malaysia-China Chamber of Commerce (MCCC), tells The Edge.

“From what I know, China’s cost in constructing rail systems is one-third that of its global competitors. Additionally, China-Malaysia relations are at their historical high.”

Anbound Consulting, a Chinese think tank and consultancy, claims China’s cost-effectiveness is the highest in the world. However, Mexico’s abrupt cancellation of a contract with Chinese firms for a high-speed rail project there has shocked the world and dealt the republic a major blow.

When a consortium led by state-owned China Railway Construction Corp Ltd won a contract for the US$3.7 billion Mexican project that was to be 85%-financed by China, it represented the republic’s first chance to export its full high-speed rail system.

China claims its participation complied with the Mexican government’s bidding requirements and blames the cancellation on “domestic factors in Mexico and unrelated to the Chinese side”.

Before the Mexican episode, China had failed to win a project in Thailand that would have seen a high-speed rail system built in exchange for rice.

The credibility of China’s rail system was also dented by a major train accident in 2011, which has brought into question the safety of the system. The crash near Wenzhou in 2011 killed 40 and injured at least 190 others. China’s former head of the Ministry of Railways was given a suspended death sentence last year for taking millions in bribes for construction projects.

But according to a write-up by Anbound’s senior researcher He Jun, China developed its own system after studying the technologies of Germany, France and Japan, and it owns the intellectual property rights to its technologies. It also has advantages in equipment manufacturing.

While these may be issues for Malaysia to consider before deciding whether China is a good candidate for the KL-Singapore HSR project, the spillover effects of granting China a role in the project cannot be ignored.

“There will definitely be a spillover into other areas of economic cooperation with China. Moreover, financing from it will be attractive,” says an investment banker.

Indeed at his meeting with Xi, Najib raised concerns over Chinese nationals’ negative perception of Malaysia after the disappearance of Malaysia Airlines Flight 370 in March.

He asked for Xi’s help in making Malaysia a favourite holiday destination for the Chinese again. Tourist arrivals from the republic have plunged since the disappearance of Flight 370 with 239 passengers, including 154 Chinese nationals.

“President Xi said positive sentiment among the Chinese people will return with the cordial relationship between the government officials of the two countries,” Najib told the local media in Beijing after his meetings with Xi and Li.

It is public knowledge that many Chinese nationals are still avoiding Malaysia. One Chinese guild, which is holding an international conference soon, laments that delegates from China will fall 50% to 200.

Tourism aside, Malaysia will also have to consider Chinese trade and investment potential. At the Apec Summit, the country’s largest trading partner reiterated its commitment to increase total bilateral trade to US$160 billion (RM528 billion) by 2017 and to correct the imbalance in investment flow. Bilateral trade has slowed and is expected to be under US$120 billion this year.

While Malaysian companies invested a total of US$7 billion in China last year, their counterparts pumped only US$1 billion into Malaysia, according to the Chinese Embassy in Kuala Lumpur.

But this year, investments by Chinese companies in Malaysia are expected to exceed US$2 billion (RM6.6 billion), driven by the Malaysia-China Kuantan Industrial Park in Pahang, said Chinese Ambassador to Malaysia Dr Huang Huikang earlier this year.

Indeed, a big steel plant costing US$1.4 billion is being built at the park, according to MCCC’s Bong.

Bernama reported on Nov 7 that China’s CEC Engineering Corp plans to build a wood pulp factory in Sabah’s Sipatang next year with an investment of US$2.66 billion (RM8.9 billion).

With investments from its traditional sources, such as the US, Europe, Japan, Taiwan and South Korea declining, Malaysia is expected to rely more on foreign direct investment (FDI) from China.

“Strategically, it is right for us to target Chinese FDI, given that its government is encouraging its companies to expand offshore. If the government-to-government and people-to-people relations stay strong, in no time, Chinese FDI will gush in,” says Bong.

In addition, Malaysia may need to consider investment opportunities for the locals in the New Silk Road Economic Belt stretching from China and Central Asia to Russia and Europe, and the 21st Century Maritime Silk Road that winds through the Straits of Malacca to India, the Middle East and East Africa.

These two formed the centrepiece of China’s economic diplomacy at the Apec Summit. Li pledged US$40 billion to the Silk Road fund for infrastructure, resources and industrial and financial cooperation across Asia.

He also promised to provide half the US$50 billion start-up capital of the newly set up Asian Infrastructure Investment Bank, of which Malaysia is a founding member, to help build infrastructure across the region.

Bong says: “The Maritime Silk Road will present tremendous investment and funding opportunities to Southeast Asia. Malaysia has an advantage as we were the first in the region to open diplomatic ties with China in 1974, and China says it will never forget that.”

This article first appeared in The Edge Malaysia Weekly, on November 17 - 23, 2014.