Malaysia’s cathartic election should not derail Chinese FDI

The country’s efforts to wipe the slate clean after the $4.5 billion 1MDB scandal should not include purging the country of Chinese infrastructure investment.

The age of Najib Razak is over. Do all of the scandal-tainted leader's policies deserve to die with him?

The May 9 election victory by the opposition, led by veteran former premier Mahathir Mohamad, marks uncharted territory for Malaysia. The country has never witnessed a transition of power away from Najib’s Barisan Nasional coalition, which has run the country since independence in 1957.

But there are some things worth hanging onto as the country undergoes its review. Mahathir inherits an economy on the upswing and Malaysia has been one of the biggest beneficiaries of China’s Belt and Road Initiative.

Malaysia has been the second best performing Asean [Association of Southeast Asian Nations] equity market year-to-date, outperforming the MSCI Asia excluding Japan index by 4.2% as $0.9 billion of foreign capital has flowed into the stock market. Over the last three months, consensus has revised up market earnings by 1%, driven by banks, energy and materials, according to Morgan Stanley equity analysts.

Najib’s official visit to Beijing in November 2016 led to the signing of 14 memoranda of understanding (MOUs) worth $37 billion (equal to roughly 11% of GDP), followed by another nine MOUs worth $7 billion (2% of GDP) in May 2017. This should mean more foreign direct investment inflows from China and help increase trade and tourism flows, according to analysis by Nomura.

A threat to this rosy scenario is the incoming Pakatan Harapan coalition's vow to review ongoing infrastructure projects, and to renegotiate or even cancel projects considered wasteful and unnecessary. The promise made during the election campaign appears to have been pandering to local fears that many of these projects are funded by China and designed to promote Chinese business. 

Take the $14 billion East Coast Rail Link (ECRL) project which will connect the largely rural east coast to Port Klang – Malaysia’s largest port. Najib’s government estimated it would transport 5.4 million passengers and 53 million tons of cargo a year coast-to-coast by 2030, boosting GDP growth in the three eastern coastal states by 1.5 percentage points.

The main contractor of the ECRL is China Communications.

On his blog, Mahathir wrote: “The government had hoped to borrow 55 billion for the East Coast Rail Link from China. There is no way the ECRL can earn enough money to repay this huge loan.”

Such concerns seem to echo populist voices around the region that Chinese investment will put economies hopelessly in hock to China. Last November, Pakistan cancelled Chinese financing for the $14 billion Diamer-Bhasha dam project.

While these contracts could well do with close examination, many of them were won through competitive tender processes. Moreover, Southeast Asia is in desperate need of greater infrastructure investment to bolster trade and economic growth, such as the ECRL and the Kuala Lumpur-Singapore high-speed rail projects.

The high-speed railway, due to open in 2026, would reduce travel time between Kuala Lumpur and Singapore to 90 minutes when it is completed.

Malaysia would lose RM209 billion in gross national income contribution if the rail project is cancelled, the project vehicle MyHSR said on May 3 according to the official Malaysian National News Agency. MyHSR is wholly-owned by Malaysia’s Ministry of Finance. (To be sure Najib is also Malaysia's minister of finance).

The rail project would spawn more than 60 civil work packages, more than 5,000 sub-contract packages and generate more than 70,000 jobs, it said. Also Malaysia would have to bear the cost of aborting the project including compensation for Singapore, MyHSR said.

The Southern Railway Project is an RM8.9 billion ($2 billion) project that forms part of a grand scheme to connect Singapore and the southern Chinese city of Kunming, and involves the upgrading of 197km of rail tracks from Gemas (near Malacca) to the southern tip of the country in Johor Bahru (across the causeway from Singapore).

A consortium of three Chinese infrastructure companies (China Railway Construction Corporation, China Railway Engineering Corporation and China Communications Construction Company) won a mandate in October 2016 to upgrade part of the track for the high-speed rail link connecting Malaysia’s southwest to Singapore.

Some of Mahathir’s election campaign was inflammatory. Mahathir channelled some of the angst of locals worried about losing business and jobs to Chinese.

He took aim at Country Garden’s $115 billion project in Forest City, which has been heavily marketed to Chinese investors. He said it would result in an influx of Chinese, a contentious matter with the majority Malay population, which hasn't always had an easy relationship with the large, wealthy Chinese minority in the country.

Such sentiment has appeared in this blog. “Even though Malaysians can buy flats, more than 90% of the buyers are Chinese.”

China is Malaysia’s biggest foreign real-estate investor by some estimates, having invested over $2 billion across 2014 to 2016, more than double the $1 billion from now- second place Singapore, according to Nomura.

Other property developers with Malaysian exposure include China Vanke, Greenland Group, China Overseas Land & Investment and China Fortune Land Development, according to equity analysts.

"The cancellation or revision of large-scale China-backed infrastructure and real estate projects poses downside risks to Malaysia’s construction sector, which has grown at an annual average of 9% between 2013 and 2017," said BMI Research, a Fitch company. "Although we do not believe that the incoming PH government will cancel projects outright, we note that there is an increased likelihood for construction- or financing -related delays as it reviews and potential attempts to renegotiate contracts."

Previously, the deadline for the primary tender for the Singapore-Kuala Lumpur high-speed railway had been pushed back from June 2018 to December 2018 following requests by bidders; the uncertainties surrounding the project following the elections could cause further delays.

While investors can hopefully look forward to sounder corporate governance in Malaysia, the new government should not be tempted to throw China out with the tainted bath water.

¬ Haymarket Media Limited. All rights reserved.
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