Doctor M’s orders

The inaugural Belt and Road Forum held in May last year was the coming-out party of Xi Jinping’s signature policy. With 29 foreign leaders attending the Beijing event, Xinhua described the gathering – rather exotically – as a “fruit forum” through which the Chinese president could take his Belt and Road Initiative (BRI) to the next level.

One of the major “fruits” was a stronger China-Malaysia relationship. The Malaysian leader at the time, Najib Razak, got the message and brought along 43 durians to celebrate the 43-years of diplomatic ties between the two countries.

The “durian diplomacy” worked. Najib returned home with key investment commitments from the Chinese including the East Coast Rail Link (ECRL), a piece of infrastructure he said would drive connectivity and economic growth for the country’s underdeveloped east coast. There were hints too that China will lift its ban on the import of Malaysia’s Musang King durians.

But while the famously pungent fruit is likely to feature in Chinese supermarkets as early as next year, China’s BRI projects now face a derailment in Malaysia. Last week the newly elected government suspended about $23 billion in China-linked infrastructure including the ECRL. Will this dash Xi’s ambition to rekindle the ancient Silk Road through the Strait of Malacca?

So what has happened?

The game-changing moment came in May as the Malaysians voted out the usually unbeatable ruling party (UMNO has been in power for decades) and cast their ballots instead for the return of the country’s former strongman Mahathir Mohamad.

By rolling out BRI-related rail and port projects, Najib had hoped Chinese loans and investments would fuel Malaysia’s economy and help win him another term. “There are some opposition politicians in my country who say we are selling our sovereignty by agreeing to such projects. But I make no apologies for wanting to build world-class infrastructure for Malaysia that will, with local ownership being preserved, open up huge swathes of our country,” Najib wrote on a blog he posted last year.

The strategy blew up in his face. Mahathir won the election with promises to review all Chinese projects and renegotiate any “unequal treaties” (a deliberate and pointed reference to the territories China itself ceded to foreign colonial powers during the nineteenth century).

The ECRL is viewed as one of the most questionable projects targeted by Mahathir’s new governing coalition. The 688-kilometre railway is designed to connect various ports on the east coast to Port Klang in the west. By traversing the peninsula, the planned rail link could potentially alter regional trade routes which currently go through the busy Strait of Malacca and the South China Sea.

As matters stand, the ECRL has also become the first Chinese investment project Mahathir’s administration has decided to review.

The project owner, Malaysia Rail Link SDN, and its main Chinese contractor China Communication Construction Corp (CCCC) both confirmed last week they’d been told to suspend work on the $20 billion railway.

The news came shortly after the arrest of Najib on corruption charges (he pleaded not guilty and was released on bail). According to Reuters, the new Malaysian government is now investigating whether his administration used Chinese funds from BRI projects to pay the debts of 1Malaysia Development Berhad (1MDB) – the state fund that is currently being investigated by six countries for money laundering and graft and was a key reason for Najib’s election loss.

How have the Chinese reacted?

The Hong Kong-listed CCCC said in a stock exchange circular last week that it will take the initiative to protect its legitimate rights as a general contractor of the ECRL project, which has a contract value of about Rmb72.8 billion ($11 billion) on its part. Construction commenced last year and the duration of the contract, assuming normal circumstances, should be seven years.

In a separate statement, the state-backed enterprise said it regretted the Malaysian government’s decision, and was “upset and concerned” over the livelihood of its more than 2,250 local employees as well as other indirect hires.

The share price of CCCC has dropped nearly 30% since Mahathir’s stunning election victory, although its senior executives have tried to put an optimistic spin on events.

Liu Qitao, president of CCCC, compared the situation with what happened to the Colombo Port City project after a new government took office in 2015. “The new administration questioned the project when they first came to power… but after negotiating, they realised the project was good for the economy and livelihoods in Sri Lanka,” Liu told a BRI conference in Hong Kong last month (see also WiC322 on how Colombo softened its stance on the port project).

So will the suspension be temporary and tactical – offering the Malaysian government a route to angle for better terms over its BRI projects? Malaysian Finance Minister Lim Guan Eng, for one, has publicly said that he believes the ECRL would only become economically feasible if there was a drastic reduction in costs, which he deemsed to be “nearly 50% higher than estimates” made under the previous government.

Meanwhile, Reuters reported last week that Mahathir is likely to visit Beijing to reopen high-level government talks, with a trip provisionally agreed for mid-August.

Should Geely be worried?

Investors in Geely Automobile might have a reason to worry about the Chinese automaker’s expansion plans in Malaysia.

The automaker agreed to acquire a controlling stake in Malaysian carmakers Proton and Lotus Car – also in May last year following the Belt and Road Forum in Beijing. But the takeover was ridiculed at the time by none other than Mahathir himself (see WiC368). “They said Proton is my brainchild. Now the child of my brain has been sold… and soon my country,” Mahathir fumed on his personal blog.

However, following a meeting with Geely’s boss Li Shufu late last month – during which the 93 year-old discussed the direction of Proton and test-drove with the tycoon Proton’s latest sport utility vehicle m(which uses technology introduced by Geely) – the Malaysian leader gave a conditional thumbs-up to the Chinese automaker.

“He [Li] came to ask me, ‘What is it Malaysia wants?’” Mahathir told reporters. “We want [Geely] to bring in manufacturers from China to help Malaysian manufacturers via joint ventures and help Malaysian producers. Otherwise, they will bring in parts from other countries and Malaysian vendors will have to close down. That is not fair, so he agreed.”

Moreover, Geely has also been keen to fit in with the local culture and offer a good example of Xi Jinping’s BRI vision. “The workers of our factory in Malaysia need to travel several hours in order to go to a mosque. That’s why Geely has decided to build a mosque next to our factory so our workers won’t need to travel so long to pray,” Li told the BRI forum in Hong Kong last month.

How about Alibaba’s ASEAN plan?

Alibaba is another Chinese firm with burgeoning business ambitions in Malaysia.

Its boss Jack Ma reached an agreement with Najib in March last year to set up a Digital Free Trade Zone that entails a joint venture with the Malaysian government to promote regional trade. It will use Alibaba’s logistics centre in Malaysia as a sourcing and fulfilment hub.

Ma – sometimes called China Inc’s unofficial “chief diplomatic officer” (see WiC410) – was among the first Chinese tycoons to meet Mahathir following his election victory.

Ma was in Kuala Lumpur last month to open Alibaba’s new corporate premises, its first ‘country’ office in Southeast Asia. “I heard there will be reviews [over Chinese investment in Malaysia]. So what? Our companies have reviews every quarter,” Ma told reporters at the opening of Alibaba’s Malaysia office.

The Chinese tycoon met up with Mahathir and reaffirmed to his one month-old government Alibaba’s commitment.

Calling Mahathir a legend, Ma also said Malaysia’s “Multimedia Super Corridor” initiative, launched by Mahathir in 1996, had served as an inspiration for him to found Alibaba in 1999.

With remarks like that Ma appears to have successfully struck a rapport with the world’s oldest democratically-elected leader. Mahathir in return said Alibaba’s Digital Free Trade Zone is exactly the kind of Chinese investment that his administration wants. “That is what we would like. I think Mr Jack Ma’s idea, Alibaba’s idea, is what we want. He wants to train Malaysians to produce things to be exported to China,” he told the South China Morning Post.

Indeed, the veteran politician even gave an exclusive interview to the South China Morning Post where he revealed his views on China. Notably the SCMPis owned by Alibaba.

Is Mahathir anti-Beijing?

This is a question that was directly posed by the SCMP to Mahathir.

“We welcome foreign direct investment, from anywhere, certainly from China. But when it involves giving contracts to China, borrowing huge sums of money from China, and the contract goes to China, and China contractors prefer to use their own workers from China, use everything imported from China, even the payment is not made here, it’s made in China. So, we gain nothing at all. That kind of contract is not something that I welcome,” Mahathir replied.

The Malaysian leader elaborated on another type of investment that he particularly doesn’t like: foreign investors (Chinese firms included) developing “very expensive cities” with real estate local that Malaysians cannot afford.

“So we don’t want to have whole cities built in Malaysia, have them purchase a big piece of Malaysian land, and then bring in foreigners to stay there. That is what I am against,” Mahathir said.

Hong Kong newspapers were quick to point out that the former strongman could be pointing the finger at Forest City, a $100 billion (you read the figure correctly) real estate project being developed by Chinese firm Country Garden in Johor state.

During the election campaign he told Bloomberg that Forest City was the kind of Chinese investment that Malaysia needed to review should he get elected.

“Here we gain nothing from the investment… We don’t want to sell chunks of this country to foreign companies who will develop whole towns,” Mahathir said.

What exactly is Forest City?

Since Xi floated the BRI idea in 2014, Chinese property developers have been looking to expand in Southeast Asia. This allows them to meet Chinese investors’ growing appetite for overseas real estate, but do so under the grand banner of a key Beijing policy.

With one fifth of Malaysia’s 31 million people being ethnic Chinese, the country has been a favourite hunting ground for Chinese developers and Chinese homebuyers alike.

Forest City is a joint venture between Country Garden and a company controlled by the Sultan of Johor, who is the biggest landlord in the southern Malaysian state bordering Singapore (he also runs his own private army). The $100 billion city was planned on a 2,000-hectare manmade island (which has since been split into four smaller ones on environmental concerns). It’s located in the narrow strait that separates the Malaysian peninsula from Singapore. When completed, it is expected to be around half the size of Macau and accommodate 700,000 residents.

Country Garden found no shortage of mainland Chinese buyers. Forest City raked in more than $3 billion in sales in 2016 alone. In its 2017 annual report, Country Garden says land use rights located in Malaysia amounted to Rmb600 million ($149 million). But the value of this asset could inflate over time: the land is freehold.

Forest City has since come under attack by politicians in both Malaysia and Singapore. According to HK01, a Hong Kong-based internet newspaper, Singaporean Prime Minister Lee Hsien Loong has repeatedly conveyed his concerns to Kuala Lumpur over the environmental impact of Forest City.

“Forest City is no longer a pure property project. This is a mirror image of the political struggle between Malaysia’s central and local government, and the relationship with Singapore and China,” HK01 reckons.

More blockades on BRI?

So far there’s been little indication that Mahathir’s administration will intervene in how Johor handles Forest City.

Yet there is a growing feeling that political resistance towards China’s Belt and Road projects is rising. The Financial Times emerging markets editor James Kynge wrote this week that the suspension of the ECRL project will not be an isolated incident. “The instances of Chinese infrastructure schemes overseas running into publicly-reported ‘trouble’ are proliferating, besmirching the reputation of the Belt and Road Initiative,” Kynge wrote.

Country Garden has carefully framed Forest City as a BRI project. But such real estate projects are not necessarily what the Chinese government wants.

Take Wang Jianlin, the boss of property conglomerate Wanda Group. The tycoon was considered China’s richest man in early 2017 but his meeting with Najib during the Belt and Road Forum in Beijing last year turned out to be pivotal (albeit not in a good way, see WiC395).

The pair met to talk about Wanda’s planned investment in a railway-linked real estate project in Kuala Lumpur. It didn’t happen and since that encounter Wanda has been forced to delever and sell off its assets (see WiC375). Chinese regulators also told Wanda and others to halt their purchases of overseas assets.

The latter move was partly in response to capital outflows that were weakening the Chinese currency. A related policy measure also put a cap on property investment overseas by restricting the amount of cash Chinese citizens could send abroad (to buy assets such as luxury flats in Forest City).

Country Garden’s boss Yang Guoqiang has proven phenomenally successful in China (see our profile in WiC416 which explains his strategy). But Yang now has a lot riding on Malaysia (as does his stock price – which this week traded at HK$12.74 versus a 52-week high of HK$19.16). He might want to follow the lead of Li Shufu and Jack Ma and request his own meeting with Mahathir soon.

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