2018/62, 14 May 2018
The return of former Prime Minister Mahathir Mohamad as Malaysia’s seventh Prime Minister on 10 May 2018 is construed by many to have a negative impact on China’s investment in Malaysia, as he had called for a greater scrutiny of these investments on the campaign trail. The critical questions now are: the extent to which his campaign pledge will be translated into actions; and will these mean a reversal of previous commitments and a halt to future investments from China.
Based on their sources of funding, there are two types of Chinese investments in Malaysia. In the case of foreign direct investment (FDI), these investments are unlikely to be affected since they are funded by equity, retained earnings, and intra-corporate loans and credit. Mahathir is not against FDI per se. Even the capital controls that he imposed during the Asian Financial Crisis (AFC) in 1997/98 were aimed at curbing volatile short-term portfolio flows rather than FDI. Profit remittances and the repatriation of capital by foreign investors remained free of control at that time. Importantly, Malaysia had continued to maintain open trade and investment policies during the AFC. Thus, regardless of the quality of FDI that has been attracted thus far, changes are not likely given that it will be viewed negatively as a shift towards a less friendly investment regime. Such a signal is economically untenable at this critical juncture of regime change. This will also apply to Geely’s investment in Proton, because buying back Geely’s shares will add fiscal stress at a time when fiscal reform is urgently needed. There is also the possibility of technology transfer from Geely and a planned expansion into the export market, something that has long been aspired by Proton but which has remained elusive. Likewise, existing Chinese investments in real estate will remain untouched, even though the majority of the locals cannot afford this high-end housing, as long as they are privately funded commercial projects. Overall, it is far more important to send a strong signal that Malaysia’s openness towards trade and investment will be continued as this is necessary for the country to move beyond its current stage of development.
However, while an open FDI regime is expected to be continued, future investments will have to contribute towards local employment and technology development, as emphasized by Mahathir. Future flows may be affected as there is a mismatch between outbound investment from China that is efficiency seeking in terms of the cost of production and the demand for better quality investment from Malaysia under the new government.
Chinese investments funded by loans guaranteed by the previous government are the ones at stake as fiscal reform is a top priority of the new government. This inevitably requires a review of the country’s debt burden. The East Coast Rail Link (ECRL) project has in particular been queried by Mahathir himself on numerous occasions, during the campaign trail. In this regard, a stocktake on the number of Chinese projects funded by government guaranteed loans be it at the federal or state level, is vital to assess the actual extent of debt incurred on Chinese projects. Second, a review will also require a reassessment on the economic viability of these projects in terms of costs and benefits based on appropriate demand projections. Of particular concern are the numerous announced port projects on the West coast of Peninsular Malaysia that may potentially lead to an increased presence of Chinese security or warships as mentioned by Mahathir himself. The one exception is Kuantan port on the east coast of Peninsular Malaysia as this project is funded by equity purchase from China, rather than a loan. Mahathir himself has categorically stated that renegotiations will take place, “if necessary”. Whether it will be necessary or not will depend on the interplay between several key factors: the need to preserve cordial ties with China, the extent of security risks involved, the actual size of Malaysia’s debt burden as well as the economic viability of the project since this will ultimately determine Malaysia’s benefit from it.
Dr Tham Siew Yean is Senior Fellow at ISEAS - Yusof Ishak Institute.
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