Investment in Malaysia: Opportunities and risks coexist

Investment in Malaysia: Opportunities and risks coexist

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Investment in Malaysia: Opportunities and risks coexist

In general, Malaysia is a place where investment opportunities and investment risks coexist. Investing in Malaysia, of course, is due to the emphasis on its rich investment opportunities, but it is also more sensible to look at these opportunities. Although the relations between China and Malaysia are generally good, the top leaders have frequent exchanges of visits, and the background of the “Belt and Road” can promote the implementation of investment projects. However, if there is a lack of ethnic conditions, political ecology, and economic policies in Malaysia before the investment. The necessary understanding will inevitably lead to a lack of policy coordination and inadequate investment docking, which will bring losses. The prevention and resolution of these risks also depend on the continuous coordination between China and ASEAN countries at the level of cooperation rules, and the formulation of rules including laws to guide and constrain investment.



In recent years, China’s investment in Malaysia has grown substantially. Under the background of China's "One Belt, One Road" the initiative, Chinese enterprises, whether state-owned or private, are entering the ASEAN countries in a big way, making China quickly become the most important investor in ASEAN. In 2016 and 2017, China’s direct investment in ASEAN countries accounted for 9.2% and 10.4% of ASEAN’s total foreign investment, respectively (in 2013, ASEAN attracted foreign investment to reach US$137 billion). In 2017, China overtook the United States and became the second-largest investor in ASEAN after Japan, and China's investment in ASEAN is largely concentrated in the infrastructure sector, which has a sustained effect on the development of the region.

Among the ASEAN countries that China invests in, Malaysia is even more bright. In 2016, China surpassed Japan and the United States and became Malaysia's largest investor. In 2017, China’s total investment in Malaysia reached US$1.6 billion, accounting for 17% of Malaysia’s total foreign investment. In addition to manufacturing, China's investment in Malaysia is mainly large-scale, capital-intensive infrastructure projects.

Several cases in which Chinese-funded companies invest in Malaysia shows that Chinese investment can effectively promote economic development in Southeast Asia. The greater the promotion of the “Belt and Road” construction, the greater the benefits of these areas. It should be said that the current “One Belt, One Road” initiative reflects more of a more flexible regional cooperation model, emphasizing the mutual benefit under relationship governance.

There is something wrong with investing in Malaysia

In general, Malaysia welcomes investment from China, and Malaysia is indeed in urgent need of capital from China to fill the gap in domestic infrastructure investment. China has become Malaysia's largest source of investment, demonstrating China's positive stance and confirming some of China's substantial achievements. However, some of China’s investment in Malaysia has suffered a lot of twists and turns; some of it has encountered insurmountable difficulties and caused huge losses.



An example of a good investment outcome is the Kuantan Port Expansion Project. Located about 25 kilometers north of Kuantan in Pahang, Malaysia, Kuantan Port is the first port on the east coast of Malaysia for ships to enter and exit all year round. Facing the South China Sea, the port is an important node for the nearest route between China and Malaysia. Kuantan Port is operated by the privately-owned Kuantan Port Consortium Co., Ltd., with China Beibu Gulf International Port Group accounting for 40%. The port expansion project began in the bank through internal financing in 2013 to build new terminals and other infrastructure in the port within an area of approximately 30 square kilometers. With the gradual completion of the expansion project, Kuantan Port has been upgraded from a former feeder port to a deep water port. Container ships from China's Huizhou Port will be docked in Kuantan, enabling it to be upgraded to the region with the logistics network of Huizhou Port. One of the most important ports.

In 2015, the two main indicators of port throughput and operating income in Kuantan doubled. The port throughput exceeded 40 million tons for the first time, doubling, of which 90% of the cargo growth was from China; more than 140,000 TEUs were completed, and the growth rate reached Two digits. In addition to its smooth progress in construction, Kuantan Port has an important significance beyond its construction, because of the Kuantan Port Project is closely related to the development of the Zhongma Kuantan Industrial Park. The industrial park is located on the east coast of the Malay Peninsula and is close to Kuantan. It is jointly developed by both China and Malaysia and is one of the famous "two-country parks". The smooth progress of the Kuantan Port Expansion Project will better assist the “Two-Double Park” project. It should be said that the expansion of the Kuantan Port is a relatively successful project for China to participate in Malaysian investment.

In contrast, the East Coast Railway project experienced many changes. Although the project that was once forced to suspend was restored, the profit forecast has dropped significantly. If it is from a business investment perspective, it is hard to be successful. The East Coast Railway Project was originally signed by the Chinese government and former Malaysian Prime Minister Najib. The Chinese side provided 55 billion MYR (about 89 billion yuan or 12.9 billion US dollars) in loans. It is currently the largest railway project in Southeast Asia and also China.

The East Coast Railway connects several key cities in Malaysia with a total length of 688.3 kilometers. The original construction time is about 5 to 6 years and is expected to be completed in 2022. However, in May 2018, after the new Malaysian government took office, it was announced that it would temporarily suspend and reassess some Chinese investment projects, including the East Rail project. In April 2019, the Malaysian Prime Minister’s The office issued news confirming that China and Malaysia signed an additional contract for the East Coast Railway. The construction cost was reduced from RM65.5 billion to RM44 billion. The Chinese made a big concession to restore the East Rail project. For example, the cost was reduced from the original 65 billion to 44 billion. The expert's assessment concluded that project profit has been very small. This is because China considers the relationship between the two countries and considers the importance of the East Rail project line under the framework of the “Belt and Road” to make the decision to take care of the overall situation.

Country Garden is also facing difficulties in the forest city project in Johor. Forest City is a large-scale real estate project jointly developed by Country Garden, a Chinese listed company, and Sudan, Malaysia. The two sides jointly established Country Garden Pacific Landscape Co., Ltd. The project covers an area of about 20 square kilometers. It is invested by Country Garden for 100 billion US dollars. The project can not only create employment opportunities, improve the local economy, but also promote the development of tourism, even the high-tech service industry, and the financial industry. The number of houses sold has reached 11,000 sets. The Forest City project was then seen as a star project in Johor and even directly affected the relationship between China and Malaysia.

However, since 2018, the forest city has quickly developed into a controversial project. Mahathir, then the leader of the opposition party, publicly criticized the project and believed that it would lead to a large number of potential Chinese immigrants entering Malaysia. After being elected as the new prime minister, Mahathir reiterated his basic position on the Country Garden Forest City project in an interview with the Chinese media. In general, he still opposed the project because he was afraid of a large several immigrants under high-priced real estate projects, and in the future. It is also impossible to issue green cards to such real estate investors. In view of this situation, the Forest City project has been suspended in China before the project. In the current situation, the locals can't afford it; the Chinese can't buy it, and the possibility of the project being unfinished is great.

The change brought about by the ruling party’s replacement

A comprehensive comparison of the above three investment cases will inevitably give people a very obvious feeling that China's investment risk in Malaysia has risen sharply, thanks to the 2018 election. Before the 2018 general election, China's investment projects in Malaysia were generally smooth, but with the new government coming to power after 2018 election, the investment situation became complicated. Some of the projects were even more serious, while others were directly stagnated. The Chinese side has caused huge losses. In the election, the opposition front led by Mahathir (the Alliance of Hope) won 113 of the 222 seats in the House of Commons, winning with a simple majority. This is the first time that Malaysian National Congress has lost control of Congress since its independence in 1957. It is also the first time in 60 years that Malaysia has achieved political party rotation.


Historically, Mahathir’s past 22 years of the ruling has been an unprecedented period of economic integration between China and Malaysia. It can be said that it is Mahathir’s efforts that have made Malaysia the biggest beneficiary of China’s investment in Asia. One, so China's investment prospects for Malaysia should be optimistic. However, a series of major changes soon appeared, and the media's attention focused more on the large-scale Chinese investment projects that were canceled or suspended.

Judging from the official release of Malaysia, the new The government has canceled or suspended many large-scale Chinese investment projects. The most important reason is that China's investment projects may cause huge government debt in the country. But whether this most important reason is fair, there are very different views between the new and old governments of Malaysia and China.

In China's view, in fact, many projects in Malaysia are financed by private institutions in China or Malaysia, such as Country Garden's Forest City project, which does not involve government debt. Even for projects involving government debt, China rarely asks the Malaysian side for sovereign fund guarantees. What's more, before the change of the ruling group, according to its official statistics, Malaysia's debt level is not high. Former Prime Minister Najib has repeatedly stated that excluding off-balance sheet items, the ratio of government debt to GDP in Malaysia has remained below the self-discipline ceiling of 55%.

However, after the new government took office, Finance Minister Lin Guanying said that by the end of 2018, Malaysia’s federal government debt and liabilities were equivalent to 80.3% of gross domestic product (GDP); if off-balance sheet items were excluded, the debt-to-GDP ratio was 65.4%. . This debt figure is much higher than the level disclosed by the former Prime Minister Najib government. Given this, Najib issued a statement criticizing that the new government claimed that the current debt size of RM1 trillion did not give details, which would disrupt the financial market, cause the credit rating agencies to be alert, and affect investors. Confidence in the Malaysian system. But the new government claims that some of the financial data of the former government may be fraudulent.

In addition to the so-called debt considerations, another important reason for the new government is that China's investment may bring immigrants, thereby expanding the size of the Malaysian Chinese community and ultimately having a major impact on Malaysia's society and elections. However, many scholars have shown that Mahathir’s real intention of cultivating the Forest City project as a politicized issue is to ensure that the Malaysian Malay Indigenous Party wins more votes in the general election. An important part of the opposition’s electoral strategy at the time was to attract Malay votes in Florida. The conservative rural Malays still remain alert to Chinese and Malaysian Chinese. Then, by linking the real estate projects invested by Chinese enterprises with the Chinese people in Malaysia, creating a public opinion atmosphere of Chinese threat theory is naturally a convenient way to win votes.

Malaysia's domestic political and economic background

In addition to the relatively recent major variables of the 2018 election, Malaysia's domestic political background, and economic policies are also indispensable factors. Including the power game between the royal family and the government, the disputes between the central and local governments around the financial region, and the friction between the government and social interest groups will continue to have a profound impact on Malaysia’s political and economic development, and thus to a considerable extent. It affects China's investment in Malaysia.



As far as the political background is concerned, the most prominent among the various issues is the growing contradiction between the federal government and the state government. One end of the contradiction is the increasingly strong federation. Malaysia is a federal state. In principle, state governments have certain powers. But in fact, the federal system is a centralized federal system, and most of its power is concentrated in the hands of the federal government. Especially since the implementation of the “New Economic Policy” in the 1970s, the federal government has further controlled the financial power and public service system. The state governments have no right to control their own taxes, and they can only rely on the sale of land in exchange for some funds.

The states at the other end of the conflict have some unique political resources that can be used to counter the federal. The Malaysian Constitution provides for the prime minister to be elected by the general election, but it is only the leader of the executive. At the same time, the Malaysian Constitution also stipulates that the state heads of the (hereditary) states of Sudan and the other four states will have the highest heads (for a five-year term) based on the (non-elected) monarchy system at the Malaysian Rulers Conference [1]. The Supreme Head of State is Malaysia’s national representative, the highest decision-maker of legislation and administration, and the Islamic leader of Malaysia and the commander of the armed forces. In addition, the Supreme Head of State is also the original state, as well as Islamic leaders in Malacca, Penang, Sabah, Sarawak, and the Federal Territory, and he must listen to the advice of individual state Islamic Councils in performing his duties.

In this way, a powerful saw between the powerful prime minister who essentially represents the federation and the supreme head of state who essentially represents the states and has the brink of theocracy is formed. In the era when UMNO actually controlled power in the relative authoritarianism, some contradictions were suppressed. Nowadays, the alliance of hope and democracy that advocates democracy and pluralism is obviously unsatisfactory, thus causing political powers and federal economic disagreements. Mutual causation and aggravation of the cycle.

As far as economic policy is concerned, the most prominent problem is that the controversial “new economic policy” does not decrease. Since Malaysia’s independence in 1957, the government has been playing an active role in the socio-economic development of the country. To eliminate poverty and achieve balanced ethnic development, the Malaysian government introduced the “New Economic Policy” in 1971. Although the Malaysian government has repeatedly stated that it wants to weaken the "new economic policy" and let the free market and the fair mechanism play a greater role, in fact, in recent years, this Malay priority and the government's economic power are the core content. The "new economic policy" has been continuously strengthened in many aspects, and has even become a political tool for political party elections.

Specifically, an important part of Malaysia’s “new economic policy” is the creation of “government-linked enterprises” to allow large state-owned enterprises representing the interests of Malays to enter important economic fields. In fact, Mahathir is very keen on such operations. He has established a a large number of large-scale enterprises in the manufacturing sector through government subsidies and administrative interventions. Such "political associations" occupy important economic sectors including natural resources, public utilities, large-scale infrastructure and financial securities, and also influence the development of private enterprises by attracting outstanding talents. Although it is hoped that the Alliance will propose to reform the "government-linked" enterprises during the the election campaign and promote a free economy, at present, it has not weakened the "government-linked enterprises" and is strengthening its ties with these enterprises.

Nowadays, more and more examples show that the reason why both the old and new governments can't open "political associations" is fundamental because these enterprises act as tools for political parties. The resources pooled by these companies are used to distribute different types of subsidies to party members in key constituencies, for project contracts, business licenses, and so on. This kind of political power seeks rent through the "government coalition". The gray "reciprocity" of the business group's commercial advantage by the "government coalition" not only has a far-reaching influence on Malaysian society but it also affects foreign investment including China.

In general, Chinese investment is needed by Malaysia, but it may also be a victim of its domestic political wrestling. Beginning in the the second half of 2018, the new government first reassessed, then suspended, and even decided to cancel some of China's investment projects, and later restored some of them, revealing the complex mentality of the Malaysian government, and even the embarrassing situation.

On the one hand, the Malaysian side is in great need of Chinese investment. Especially on some major projects, China’s status is almost irreplaceable. On the other hand, Malaysia’s domestic political situation is complicated. To weaken the influence of the former government, the new government has made Cancel or suspend decisions such as the East Coast Railway. Even in private investment projects such as Country Garden Forest City, the new the government does not hesitate to intervene in the market with rather rude decisions, which is also a reflection of competition among various political forces in the country. We have reason to believe that investment from China is indeed in demand for Malaysia, but if the political ecology in Malaysia changes, the potential loss of Chinese investment may also be huge.

Theoretical the perspective of problem analysis

There are three analytical perspectives on the experience of Chinese investment in Malaysia. Each of them has certain reasons, but they cannot fully explain the problem. Selective and comprehensive reference will help China to avoid investment losses and achieve reasonable returns under the established conditions.

The first is a realistic perspective of realism advocated by conservative Western scholars. After China's "One Belt, One Road" the initiative, the realist factions in Western academic circles believe that the "One Belt, One Road" initiative is essentially the performance of China's geopolitical demands in the economic field, that is, China intends to use its economic development advantages to bring neighboring economies. Incorporate into its own development trajectory and eventually form a regional order centered on China.

The second is the perspective of a liberal school of internationalists or institutionalists. They believe that China has neither the will nor the ability to challenge the current liberal international order based on Western rules. They believe that the international order based on rules and systems will be lasting and can adapt to the development of China's "One Belt, One Road" initiative, and China will follow this international order.

The third perspective is the theory of the relationship governance proposed by Chinese scholars. The theory of relationship governance represented by Qin Yaqing is based on the concept of yin and yang in Chinese philosophy and its balanced thought, and advocates the realization of a complementary and harmonious international relationship in mutual coordination and mutual tolerance. The theory of relationship governance advocates harmony and tolerance in Confucian culture, reasonable thinking and courtesy, and emphasizes that foreign policy decisions are not short-term interests, but long-term interests. Therefore, China's investment in the ASEAN region, including Malaysia is an example of its integration into East Asian cooperation and integration into international order and global governance. Finally, on the practical level, relational governance theory advocates the strengthening of mutual trust through the establishment of a community of destiny, thus solving the most difficult problem of trust in international relations, with particular emphasis on achieving win-win through negotiation at the government level or negotiation at the level of leaders.

It should be said that the theory of relational governance does have aspects that transcend traditional realism and liberalism, but only emphasizes that the positive side is also incomplete and lacks the basic institutional arrangement. Relationship theory repeatedly emphasizes mutual trust, but mutual trust is based on actual interests. If an effective ex-ante risk control mechanism and ex-ante relief channels cannot be established, there is no sustainable mutual trust, which is precisely not fully explained by the relationship theory.

Therefore, after combining the three theoretical perspectives, it is also necessary to point out that no matter how to interpret the “Belt and Road” and its overseas investment at the theoretical level, it is necessary to strengthen institutional arrangements when implementing the practice level to avoid major benefits. Losses and claims following the law when losses are inevitable. For the analysis of institutional arrangements, at least on a more specific level, the following aspects should be noted:

Aspects that should be noted in institutional arrangements:

1. The Chinese investment strategy needs to take care of the political demands of the Malaysian side.

From the above investment cases, only the investment that meets the local political demands can be guaranteed. The success of the Kuantan Industrial Park and the Kuantan Port project, the East Coast Railway project has been repeated, the Country Garden project is in trouble, in addition to being influenced by the Malaysian general election, in essence, it is because these projects are related to the Malay politics. The degree of suitability of the appeal is different.

Kuantan Industrial Park has created many employment opportunities for the eastern region. The East Rail project has been connected to economically backward towns and villages through three Malay-intensive states. This kind of investment effect, whether it is the Umno, which has been more authoritarian, or the Alliance of Hope, which is now self-proclaimed, will be welcomed. Also, after losing its political power, Umno further cooperated with the Islamic Party, strengthened its control over the East Coast parliaments, and won several state seats, which resulted in the head of Mahathir. The new government has greater governance pressure in the region.

The new government immediately realized that it's most urgent the task in the region was to revitalize the troubled economy and ensure the legitimacy and sustainability of its governance. So the East Rail project, which was once stranded because of its political demands, was restored, although the conditions were very unfair to the Chinese side.

In contrast, although the Country Garden Forest City project also relied on the background of the “Belt and Road Initiative”, even the previous government of the Malaysian State endorsed the Country Garden project, but it was politically obvious. First of all, because the local Malays are completely unable to bear the high real estate prices of Country Garden, most of the real estate created is for the rich overseas (China), and the project shows a large-scale absorption of external capital to operate, local horses People think that they have not benefited. Secondly, Malaysia has always had racial differences and doubts about the loyalty of Malay Chinese. Any excessive enthusiasm attempt to establish close ties with China may cause strong opposition. This is also the main reason for the forest city project to invite Mahathir public criticism. the reason.

2. Chinese investment should avoid sensitive areas of the federal and state relations

The relationship between federal and state governments is important, and it will affect Chinese investment in Malaysia. For example, the relationship between the Sultan of Johor and the federal government is typical. As the second-largest state in Malaysia, the relationship between the Sultan of Johor and the central government has been further complicated by the federal government’s construction of the 9,300-hectare Iskandar Special Economic Zone in 2006, which has intensified the existing Malay. The tension between people and non-Malays, the federal government and the state government is ultimately reflected in the Forest City project. Although Johor can benefit from the project, Johor Sultan believes the project has eroded the land use rights and sales rights traditionally controlled by the Johor state government, affecting the state's fiscal revenue.

Therefore, although the Sultan of Johor is very supportive of the Country Garden project, it just happens to step on the pain points of the new federal government. The new government is worried that Johor is close to Singapore, and a large-scale project such as the forest city will exacerbate the Iskandar special economic zone effect, which may lead to the southward shift of Malaysia's national economic focus. And once the forest city project is completed, it is followed by the rapid increase of new immigrants, especially the new immigrants in China, which is particularly excluded by the new government. Although the Federal Government of Malaysia recognizes the need to allocate resources evenly across all states and promote balanced social and economic development, it has traditionally been wary of the country’s economic focus. This also reveals that Malaysia lacks a cohesive and authoritative institutional arrangement.

3. Chinese investment depends on geopolitical significance

Another important factor affecting Chinese investment in Malaysia is the geopolitical significance of investment projects. The geopolitical significance of the East Coast Railway is that after the completion of the East Coast Railway, Malaysia and even Southeast Asia will be more closely connected after the completion of the Trans-Asian Railway Hub. It can connect the Kuantan Port and the Zhongtai Railway on the East Coast. This will greatly enhance Malaysia’s international trade capacity and enhance Malaysia’s position in ASEAN.

Also, Malaysia has the vision of developing into a developed country by 2020, but it is not yet capable of proposing any grand the project with a global perspective, and is more willing to cooperate with China's largest trading partner. At the beginning of the planning, Malaysia took into consideration the need to connect the project with the Zhongtai Railway to build a land transport corridor from southwest China to Malaysia. This railway can serve as a hub for the Trans-Asian Railway and will have an important impact in Malaysia and throughout Southeast Asia. In this sense, the East Rail project is in line with Mahathir’s geopolitical vision and the country’s future development goals.

4. Chinese investment should strengthen the awareness of rules

Building rules and strengthening regular orientation are development trends. Negotiations on rules in future new regional and international cooperation are indispensable. China has always emphasized mutual benefit, but this does not mean the exclusion of rule building and institutional arrangements. Rule governance and relationship governance should complement each other and strengthen each other. For example, rules can make information more transparent, reduce transaction costs, reduce system uncertainty, and enhance the predictability of a country's international behavior.

Before China implements some investment projects in Malaysia, if there are more detailed rules, it is very important to make clear provisions on compensation for failure to perform. It is necessary for China and Malaysia and other ASEAN countries to establish some appropriate institutional arrangements to institutionalize and legalize the consensus between the two sides, and to form a partnership based on the cooperation a system based on principles and rules. Multi-functional cooperation mechanisms in principle, such as transparency and fiscal sustainability, can ensure that the interests of both parties are not impaired.



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