The impact of Chinese investments in Malaysia

The impact of Chinese investments in Malaysia

Money has flowed into Southeast Asia as China seeks to expand its influence in the region. There has been a recent surge of Chinese investment in Southeast Asia associated with the Belt and Road Initiative (BRI), including the recent East Coast Rail Link (ECRL) connecting Malaysia’s east and west coasts. For countries like Malaysia, these investments in infrastructure offer clear benefits but also come with costs, both economic and strategic.

China’s strategic investments

After a trip to China in November 2016, Malaysian Prime Minister Najib Razak returned with over $34 billion in deals largely oriented around infrastructure development. Najib’s return was met with both optimism and concern. The optimism stemmed from the potential benefits that such infrastructure developments will bring. The concern stemmed from the growing Chinese influence in Malaysia.

Chinese investment into Malaysia has steadily risen since Chinese President Xi Jinping came to power in 2012. More recently, however, China has begun cutting back on its total outbound direct investment while targeting investments in line with its strategic aims.

At the centre of these investments is The Belt and Road Initiative (BRI), an ambitious plan to increase regional connectivity and enhance Chinese soft power. As part of the initiative China has been supporting infrastructure development along the old Silk Road between Europe and China as well as in Southeast Asia.

Figure 1 – UNCTADStat (2017)

Welcome investment

The East Coast Rail Link (ECRL), a $13 billion rail line, is a prime example. Financed with an 85% loan from the China Exim Bank, the rail line will connect the prosperous west coast of the Malaysian peninsula and its relatively undeveloped east coast. The line will ultimately run from Port Klang on the west coast of the Malysian peninsula to Kuantan Port, on the east coast and then up to the north-eastern corner of Malaysia.

By doing so it increases the potential of the Malaysian peninsula’s east coast, strengthening its connection with the critical Malacca strait, the gateway between Southeast Asia and South Asia, the Middle East, and Africa.

The ECRL has even been hailed as an alternative route to circumnavigating the Malaysian peninsula via Singapore. By connecting Port Klang on the west coast and various ports, including the deepwater Kuantan Port (being developed in part by a Chinese consortium) on the east coast, the ECRL could pose a cheaper option.

The ECRL, however, will have a limited capacity. It is estimated that 53 million tonnes of cargo will use the ECRL annually by 2040, less than 10% of what currently passes through Singapore. Furthermore, the viability of such a route is limited by the logistics of unloading and reloading cargo to use the ECRL.

The ECRL will nonetheless help boost the development of trade and tourism in eastern Malaysia. Current infrastructure connecting the east and west coasts is limited to only roads, highways, and small rail lines. The ECRL will cut down the amount of time it takes to get from Gombak, on the west coast, to Kota Bharu in northeast Malaysia, from seven hours to four hours.

The investment comes at a convenient time since foreign direct investment (FDI) inflows to both Malaysia and ASEAN more broadly have begun to decline in recent years. Political uncertainty stemming from both local and transnational politics, such as the 1MDB scandal and the US withdrawal from the TPP, have damaged investment prospects. Malaysian FDI inflows declined by 10% between 2015 and 2016 to just under $10 billion. Chinese FDI helps to compensate for that decline.

Figure 2 – UNCTADstat (2017)

At what cost?

One of the potential costs of embracing these investments is that it fractures the already faltering ASEAN community. As individual countries fall under the economic influence of China, ASEAN grows increasingly unable to unify against Chinese expansion. China is already Malaysia’s top export and import destination, and as Chinese investment into Malaysia grows Kuala Lumpur will be hard pressed to stand up against Chinese influence.

The impacts of Chinese investment have already emerged. In 2012, Cambodia refused to support a push by other members to decry China’s actions in the South China Sea. Cambodia claimed to be uninfluenced by Chinese aid and investment but its fellow ASEAN members were unconvinced – China is Cambodia’s largest foreign investor and invested over $9 billion between 1994 and 2012.

More recently the Philippines has largely set aside its victory in the arbitration tribunal which invalidated many of Beijing’s claims in favour of developing strong ties with China. This stance is at least partially seen as a way of courting Chinese investment. In recent ASEAN security meetings, the Philippines pushed to drop references to land reclamation and militarization. The result was little to no progress on pushing back against Chinese advancements.

Besides weakening ASEAN cohesion, it remains unclear exactly how else Chinese investments might impact Malaysian politics. The main risks cited by the opposition are that Malaysia is becoming increasingly dependent on Chinese money and that critical infrastructure and businesses will be Chinese controlled. This could translate into reduced sovereignty and local businesses ultimately losing out. Critics point out that much Chinese FDI has been in the form of acquisitions, not greenfield investments, which contribute less to development.

Politics and economics are interlinked – it will be hard for Kuala Lumpur to stand up to China in the South China Sea or elsewhere when so much of the economy is linked to Chinese investment. In this context it makes sense for Malaysians to be cautious, but it makes little sense to turn down the increased connectivity and potential growth. Managing the investments and ensuring they can be linked to development, not rejecting them outright, will help justify the increased integration on China.


Categories: Asia Pacific, Finance

About Author

Peter Hays

Peter is a London based analyst. He specializes in trade and regulation in the Asia Pacific region. He holds a MSc in Economy, Risk and Society from the London School of Economics and a BA in International Studies from American University.