China's south-east Asia push threatened by new Malaysia regime

Chinese president Xi Jinping and former Malaysian prime minister Najib Razak thought they had devised the perfect “win-win” deal.

Beijing pledged tens of billions of dollars in loans and investments to support Malaysia’s economy and Mr Najib promised to roll out Chinese rail and port developments, as other Belt and Road projects stalled across south-east Asia.

However, the Malaysian people got in the way, last week voting out the ruling party headed by Mr Najib for the first time in 60 years, in part because of accusations that their graft-tainted leader was selling out the country.

Riding the wave of anger at Mr Najib, new prime minister Mahathir Mohamad has promised to review all Chinese projects and renegotiate any “unequal treaties”, threatening to destroy the image of Malaysia as the posterchild for Mr Xi’s Belt and Road Initiative and upset China’s position in the country, a strategic crossroads for Asia.

“China had a long experience in dealing with unequal treaties and China resolved it by renegotiation,” Mr Mahathir said. “So, we feel we are entitled to study and, if necessary, renegotiate the terms.”

Despite Mr Xi’s ambitious strategy to build new infrastructure corridors through south-east Asia and central Asia, implementation overseas has proved harder than in China. High-profile rail projects in Indonesia, Laos and Thailand have been delayed because of disputes over cost, financing and land acquisition.

Mr Najib, who tightened the screws on Malaysia’s already authoritarian system as he was weighed down by financial scandals, promised to fast-track more than $30bn of Chinese port, rail and other infrastructure projects, in a similar fashion to Mahinda Rajapaksa, the former strongman president of Sri Lanka.

“They spotted weakness in Najib, just like they did in Rajapaksa,” said one investment banker in Kuala Lumpur. “But the Malaysian people didn’t want to end up like Sri Lanka, handing over assets to China because they can’t pay off the debts.” 

Mr Najib has now been banned from leaving the country by Mr Mahathir, who is determined to keep his campaign promise to investigate the former prime minister’s links to the country’s largest ever corruption scandal. Mr Najib has consistently denied any wrongdoing.

Euben Paracuelles, an economist at Nomura in Singapore, said investors would have to “revisit the view that Malaysia is one of the top beneficiaries of the Belt and Road Initiative”.

“It is hard to say if projects will be cancelled but, at the minimum, they could face fairly significant delays, with no new projects approved for the time being.” 

Members of Malaysia’s new governing coalition have argued that the $14bn East Coast Rail Link is one of the most questionable projects, in terms of value for money and benefits for the Malaysian people. 

“This thing is not going to be economically viable, it is not going to pay for itself,” Jomo Kwame Sundaram, a veteran Malaysian economist, said in an interview before he was appointed to Mr Mahathir’s advisory council at the weekend.

With construction launched last year, the ECRL will connect the country’s less-developed east coast to southern Thailand and the capital, Kuala Lumpur, with Mr Najib’s government saying it would create 80,000 jobs and spur industrial expansion. It is being built by China Communications Construction Company and is 85 per cent funded by loans from Export-Import Bank of China, both state-owned entities. 

Malaysian prime minister Mahathir Mohamad said he would review all Chinese projects and renegotiate any ‘unequal treaties’ © Bloomberg

Lee Chean Chung, a state assemblyman in Pahang, which is home to part of the ECRL and a big Chinese port and industrial zone project, said locals wanted jobs and growth but feared that these initiatives were “too expensive and not sustainable”.

“We need to renegotiate the terms to make sure these projects benefit locals, emit less pollution, and are more transparent,” he said.

During the election, Mr Najib tried to emulate Beijing’s tactics overseas, by appealing to the local ethnic Chinese population — which comprises a fifth of Malaysia’s 31m people — to back the Belt and Road projects.

But Malaysian Chinese such as Mr Lee and Wong Chen, a member of parliament in Mr Mahathir’s governing coalition, said that although they can speak Mandarin, they were Malaysians who were not seeking — and would not offer — special treatment.

“Trade with us on a commercial basis,” said Mr Wong. “We do not want political deals.”

Although he has met Mr Xi before, Mr Mahathir, a 92-year-old who veers between harsh rhetoric and hard-bitten pragmatism, will have a tough job winning concessions from the Chinese president, who has taken an increasingly assertive foreign policy stance.

Beijing has said little publicly so far beyond congratulating Mr Mahathir on his victory and arguing that under his watch, bilateral ties would “move forward in a steady and sustained manner”.

Zhang Baohui, a professor of political science at Lingnan University in Hong Kong, believes Beijing will consider offering concessions to Mr Mahathir because Malaysia is strategically important.

“Beijing has a bigger game plan to maintain the public image in the region that China’s rise is good for them,” he said. 

Murray Hiebert, a south-east Asia expert at the Center for Strategic and International Studies in Washington, said that despite the hype, the BRI had not “paved many streets with gold in south-east Asia”.

“Malaysia was light years ahead of everyone else and, if China wants to stay, they are going to have to compromise,” he said.

Additional reporting by Stefania Palma in London

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