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Malaysia

Malaysia

Since the establishment of diplomatic ties in 1974, Malaysia has enjoyed a relatively stable and good relationship with China, with the country’s substantial ethnic Chinese minority playing a key role in advancing bilateral trade and investment. The Belt and Road Initiative has further boosted relations but also brought forward new challenges.

Malaysia

Written by Guanie Lim.
Updated on 8 April 2021.

Historical Background

Malaysia has enjoyed a relatively stable and good relationship with China. This is largely undergirded by two factors. Firstly, Malaysia was one of the earliest countries in Southeast Asia to recognise the People’s Republic of China (PRC), establishing diplomatic ties with Beijing as early as 1974, merely three years after the PRC was admitted into the United Nations. Capitalising on this ‘early mover advantage’ and its proximity to China, Malaysian–Chinese bilateral ties have blossomed under successive governments. Secondly, Malaysia’s ethnic Chinese minority (which constitutes about 25% of the population) has long played a key role in advancing bilateral trade and investment, despite state-sanctioned affirmative action policy limiting their participation in some activities. Many of these Malaysian Chinese have invested in China since Beijing started its economic reforms in 1978. Following the launch of the Belt and Road Initiative (BRI) in 2013, they have intensified ties with their counterparts in mainland China who intend to enter the Malaysian (and by extension, Southeast Asian) market. 

BRI Status

Since achieving independence from British rule in 1957, Malaysia has successfully transformed its previously commodity-driven economy into a middle-income economy, maintaining a relatively open stance towards foreign trade and investment and taking advantage of its low labour cost. This development model, however, has come under considerable stress as Malaysia has become less appealing in the eyes of international investors, following the emergence of a newer cohort of developing economies such as Vietnam and Indonesia. Some economists have argued that the reduced levels of private investment have been partly caused by Malaysia’s decades-old affirmative action policy, which is designed to redistribute income across ethnic groups supposedly discouraging investors.  

As trade and foreign direct investment (FDI) from ‘traditional’ sources such as industrialised Western countries, Singapore, and Japan dwindle, Malaysian policymakers are forced to seek alternative sources. China has thus emerged as an attractive prospect, especially since the launch of the BRI. In May 2017, on the occasion of the first Belt and Road Forum, Malaysia signed a Memorandum of Understanding (MoU) for BRI cooperation with China. To facilitate economic ties between the two countries, during former Prime Minister Najib Razak’s tenure (2009 to 2018), the Malaysian Ministry of International Trade and Investment (MITI) established the Belt and Road Initiative National Secretariat (BRINS). In 2019, BRINS was renamed China Section to better reflect the work of the department, which also encompasses other bilateral matters not related to the BRI. 

Indeed, some of the most prominent Chinese projects were initiated during the Najib era. In November 2016, under the aegis of Najib, prominent figures from the Malaysian corporate and public sectors inked 14 business-to-business agreements and 16 government-to-government MoUs with their Chinese counterparts. These MoUs amount to approximately 144 billion MYR (36 billion USD), including high-profile undertakings such as the East Coast Rail Link (ECRL) and the acquisition of four Chinese littoral mission ships. Other significant projects include the Malaysia-China Kuantan Industrial Park (MCKIP) and Bandar Malaysia, a 197-hectare mixed development project in the heart of Kuala Lumpur. These projects act as catalysts to attract even more trade and investment to Malaysia, but are challenging to execute because of their capital intensity and technological complexity. In addition, their rollout has been complicated by Malaysia’s inability to insulate them from unsolicited sociopolitical scrutiny and pressure. Recent controversies include alleged power abuse by politicians linked to some of these projects. 

Economic Relations

Investment: According to the Malaysian Investment Development Authority (MIDA), in 2019 China was the largest investor in the country, contributing 15.3 billion MYR (3.8 billion USD) of FDI compared to the 14.2 billion MYR (3.6 billion USD) of the United States, 5.6 billion MYR (1.4 billion USD) of Singapore, 5.2 billion MYR (1.3 billion USD) of Taiwan, and 3.8 billion MYR (950 million USD) of Japan. Although there is no publicly available data on Chinese investment on a sectoral basis, a recent survey reveals that real estate, construction, consumer and retail, manufacturing, and oil and gas are popular destinations. More interestingly, statistics provided by MIDA show that Chinese investment is generating the greatest amount of employment among the top five investors, with 14,174 jobs having been created by Chinese investors, followed by 9,297 by investors from Singapore, 4,578 fromUnited States, 3,642 from Taiwan, and 2,789 from Japan.

Trade: China has been Malaysia’s largest trading partner since 2009, with bilateral trade valued at 316.6 billion MYR (79.2 billion USD) in 2019, accounting for 17.2% of Malaysia’s total trade in that year. Trade is especially dense in electrical and electronic goods, with both sides importing and exporting components and finished goods in large quantities. In commodities, trade takes on a more one-way character with Malaysia exporting relatively simple products (such as petroleum and agricultural goods) to the Chinese market. Following both countries’ signing the Regional Comprehensive Economic Partnership (RCEP) agreement on 15 November 2020, the largest free-trade agreement in the world, it is expected that bilateral trade and investment will soar in the coming years. Yet, scepticism remains. A coalition of non-governmental organisations (NGOs) has voiced their concerns regarding the agreement’s circumscribing of policy space and national sovereignty. 

Source: Chinese Ministry of Commerce.

Controversies

Lack of transparency: Despite the strong investment and trade relationship as well as cordial political ties between both countries, several Chinese projects have sparked controversy due to their alleged lack of transparency. One of the most prominent examples is the ECRL, an ambitious 600-kilometre project connecting the relatively backward east coast states (Pahang, Terengganu, and Kelantan) to Selangor, the country’s most economically prosperous state. Announced in November 2016 and then targeted by opponents of Najib during the run-up to the country’s historic 2018 general election as a ‘white elephant’ project lacking transparency, the ECRL  was dramatically cancelled by then Prime Minister Mahathir Mohamad (who defeated Najib at the polls) during an official visit to China in August 2018. However, the project was revived on 15 April 2019 after both sides renegotiated some of the commercial terms. Scant detail is available on the renegotiation process, but newspaper reports suggest that the binding nature of the ECRL deal was a sore point for the Malaysian renegotiating team, who felt that the terms were lopsided. Recent research also indicates that Mahathir’s bold move to slash the ECRL was driven by his desire to renegotiate the terms of the original project rather than cancelling it outright.

Disconnect from the local society: Some Chinese projects in Malaysia have been subjected to criticism due to their disconnect from the local society. The Forest City is the most high-profile case in point in this sense. Taking the form of four man-made islands sandwiched between the narrow waterways separating Malaysia’s southernmost Johor state and Singapore, the Forest City project was launched with great fanfare in 2013. In spite of its lofty ambitions to become one of Southeast Asia’s foremost smart cities and expectations that it would bring in a projected total investment of 58 billion USD, Forest City has attracted criticism from several quarters. Some of the sharpest backlash centred on allegations that the project has led to significant outflows of capital and jobs to Chinese firms and to an influx of Chinese immigrants. Adding fuel to fire is the enclaved nature of Forest City. With an average price of 1,200 MYR (300 USD) per square foot, residential units are effectively priced too high for the majority of Johoreans, exacerbating the lack of low-cost housing in the locality. Indeed, this groundswell of discontent was picked up in a survey conducted in February 2018, merely three months before the general election. The survey noted that as many as 29% of respondents in Johor expressed distrust and a sense of disconnect with massive projects claimed by the developers to be contributing to the BRI. They were also unhappy with the influx of Chinese investment, which was thought to have contributed to rising property prices in the state.

Key Sources

English-language Media:

Reuters, Associated Press, BBC, Channel News Asia, and The Straits Times all have correspondents in Malaysia and report from the nation.

Local media outlets in English include Malaysiakini, Malay Mail, Free Malaysia Today, as well as the government-owned The Star.

Books, Reports, and Scholarly Articles:

  • Camba, Alvin. 2020. ‘Derailing Development: China’s Railway Projects and Financing Coalitions in Indonesia, Malaysia, and the Philippines.’ Global Development Policy Center, Boston University, GCI Working Paper no. 8. Link.
  • Chin, James. 2009. ‘The Malaysian Chinese dilemma: The Never Ending Policy (NEP).’ Chinese Southern Diaspora Studies 3: 167–82.
  • Gomez, Edmund Terence, Siew Yean Tham, Ran Li, and Kee-Cheok Cheong. 2020. China in Malaysia: State–Business Relations and the New Order of Investment Flows. Singapore: Palgrave Macmillan.
  • Jones, Lee and Shahar Hameiri. 2020. ‘Debunking the Myth of “Debt-Trap Diplomacy”.’ Chatham House. Link.
  • Li, Ran and Kee-Cheok Cheong. 2017. ‘Huawei and ZTE in Malaysia: The Localisation of Chinese Transnational Enterprises.’ Journal of Contemporary Asia 47, no. 5: 752–73.
  • Lim, Guanie. 2015. ‘China’s Investments in Malaysia: Choosing the “Right” Partners.’ International Journal of China Studies 6, no. 1: 1–30.
  • Lim, Guanie, Chen Li, and Xianbai Ji. 2021. ‘Chinese Financial Statecraft in Southeast Asia: An Analysis of China’s Infrastructure Provision in Malaysia.’ The Pacific Review: 1–29. 
  • Lim, Guanie, Chen Li, and Emirza Adi Syailendra. 2021. ‘Why Is It So Hard to Push Chinese Railway Projects in Southeast Asia? The Role of Domestic Politics in Malaysia and Indonesia.’ World Development 138: 105272. 
  • Liu, Hong and Guanie Lim. 2019. ‘The Political Economy of a Rising China in Southeast Asia: Malaysia’s Response to the Belt and Road Initiative.’ Journal of Contemporary China 28, no. 116: 216–31. 
  • Malaysian Investment Development Authority. 2019. ‘Malaysia Investment Performance Report: Crafting the Future.’ Malaysian Investment Development Authority website. Link.
  • Moser, Sarah. 2018. ‘Forest City, Malaysia, and Chinese Expansionism.’ Urban Geography 39, no. 6: 935–43.
  • Ngeow, Chow Bing. 2018. ‘The Political Economy of China’s Economic Presence in Malaysia.’ In China’s Footprints in Southeast Asia, edited by Maria Serena I. Diokno, Hsin-Huang Michael Hsiao, and Alan H. Yang. Singapore: NUS Press: 90–116.
  • Pua, Tony. 2011. The Tiger That Lost its Roar: A Tale of Malaysia’s Political Economy. Kuala Lumpur: Democratic Action Party.
  • Tham, Siew Yean. 2019. ‘The Belt and Road Initiative in Malaysia: Case of the Kuantan Port.’ ISEAS-Yusof Ishak Institute website. Link.
  • Todd, Laurence and Meghan Slattery. 2018. ‘Impacts of Investment from China in Malaysia on the Local Economy.’ Institute for Democracy and Economic Affairs website. Link.
  • Zhang, Miao. 2020. ‘Beyond infrastructure: re-thinking China’s foreign direct investment in Malaysia’, The Pacific Review: 1–25.

Cover Photo: Sergii Gulenok (CC).

Updated on 8 April 2021.

Guanie Lim is an Assistant Professor at the National Graduate Institute for Policy Studies, Japan. His main research interests are comparative political economy, value chain analysis, and the Belt and Road Initiative in Southeast Asia. He is also interested in broader development issues within Asia, especially those of China, Vietnam, and Malaysia. His latest monograph—The Political Economy of Growth in Vietnam: Between States and Markets (2020)—details the catching-up experience of Vietnam since its 1986 doi moi (renovation) reforms.