The relation between China and Malaysia keeps changing since Mahathir Mohamad became the new Prime Minister in 2018. Mahathir Mohamad conducted series of reformation, which deeply affects the relations between China and Malaysia, as well as the investments poured from China.

Part I China Compromise On ECRL Project

China and Malaysia have signed a new agreement on 12 April to re-active the Chinese invested railway link project East Coast Rail Link (ECRL) in Peninsular Malaysia.

The route and length of ECRL were realigned and most importantly, China government has agreed to cut down the project cost to $10.54 billion, which is almost one-third lower than the previous. The announcement shows Chinese investment is facing uncertainty in the new Malaysia and no longer enjoy the economic bonding like they used to have.

In the past, Chinese investments were welcome and granted to access Malaysia by the policy. “China is a true friend and strategic partner to Malaysia”, “Malaysia stood to benefit from Xi’s Belt and Road Initiative” (BRI), said the former prime minister Najib Razak when he was in power.

BRI Sketch Map, source:

Najib Razak himself had visited Beijing several times to strengthen the co-operative bond between two countries. Numbers of mega projects’ contract like Forest City, ECRL, Melaka Gateway, Kuantan Port Expansion, and Johor Robotic Future City were signed, and huge sums of money had loaned during every single visit.

Even though the money was loaned to use in the construction of the megaproject, nearly $700 million from the amount had been transferred to Najib Razak personal account. With the thought of “cash is king”, Najib Razak doesn’t concern about the future impacts China leave to Malaysia, what he wants is using cash to solving his debts in 1MDB.

ECRL was one of the China projects that approved by the former prime minister Najib Razak to prompt the economy of east coast region through linking the east and west logistics system. However, current prime minister Mahathir Mohamad halted it after he took over the power.

“Lots of people don’t like Chinese investments”, “Here we gain nothing from the investments”, Mahathir Mohamad said in the interview to show his strong dissatisfaction towards the Chinese investments in Malaysia. ECRL is especially the project that Mahathir Mohamad wants to reassess as it is a part of China’s global development strategy BRI.

It was a dilemma while making the decision on resuming or canceling ECRL. The decision got stuck on because of the heavy national debt of Malaysia left by the previous government. The new government has not enough budget to afford the project if it remains the original cost which is $15.68 billion. With paying the original cost, the fiscal deficit of Malaysia will be more unsolvable. If Malaysia dumps the project directly, $7.18 billion would have to pay to China as a penalty.

As a result, negotiation with China government was the only way to go. In the final negotiation of ECRL in Beijing, the Malaysian prime minister’s special envoy Daim Zainuddin was obligated to turn ECRL into a slim-down and affordable project. The details of the negotiation were announced by Mahathir Mohamad afterward in the news conference.

The final decision of ECRL shows that China side made more concession than Malaysia.

The advantages that Malaysia has gained is besides 32.8% off from the original cost, China Communications Construction Company Ltd (CCCC) will return $0.74 billion to Malaysia, which was the advance payment of ECRL Phase 2 to alleviate Malaysia financial burden. With the concept of prioritizing Malaysian, Daim Zainuddin successfully increases the local participant in the ECRL project from 30% to 40%. Moreover, China was asked to import more of Malaysia’s palm oil to ensure the “fair trade”.

Not only ECRL, to avoid falling into what Mahathir Mohamad calls debt-trap diplomacy, but a number of China-funded projects were also halted and suspended by the new government right after its victory in the election. 

Mahathir Mohamad stands firm on dropping the energy pipeline in Sabah which valued $0.6 billion and was known as the second big infrastructure project next to ECRL. The Chinese investors were also banned to get the visa or residential right through buying the properties which China-funded in Malaysia.


Part II: China’s Other Investments Face Rocky Times

China’s direct investments in Malaysia are facing rocky times. The process of canceling ECRL to rebuilding is an epitome of the whole China investment in Malaysia. 

Since President Xi suggested the strategy called Belt and Road Initiative (BRI) in 2014, China has been expanding investments and trade routes around Asia. Malaysia, as an important transportation junction nearby Malacca, becomes a key role in the BRI plan. Also, in South Asia, Vietnam and Laos are not on the side of China; Singapore and Brunei are not close to China too, which makes Malaysia extra vital. The series of investments include Melaka Gateway, Forest city, Kuala Linggi International Port, ECRL and some other retail businesses.

China’s main projects in Peninsula Malaysia)

China’s main projects in East Malaysia)

However, the investments shift along with the political situation. Some of the direct investments are already finished before Mahathir Mohamad took charge. Some other major ones have already been delayed or even shut down by the new government.

Melaka Gateway project was launched in February 2014 under Najib Razak’s government, costing $4.3 billion. It is one of the major projects of the BRI plan, aiming to attract up to $2.5 billion tourists and create 1,500 jobs over the next decade.

Najib Razak said at the announcement of the development that: “The Melaka Gateway is an innovative tourism product [and] complements the government’s tourism target”. The master developer for the Melaka Gateway, KAJ Development Sdn Bhd, told media that the project has already appealed to billions of Ringgits in overseas direct investment.

However, after Mahathir got in charge, the project brings disputes as the Malaysian government debts keep going on. There are reports revealing that the program was delaying construction fee to the Chinese company, leaving Chinese workers having survival problems.

As a result, the government shelved the project for three months in 2018. After that, hundreds of Chinese construction workers came back home without pay. At present, the policy to Melaka gateway problem is still unclear although the official saying from the government is that the project will continue.

Another symbolic investment move of BRI is the Forest City project in Johor Bahru. Forest City project belongs to China estate company Country Garden. The program started in 2013, occupying massive 14-square-kilometers, invested in $100 billion. The township was aiming at north China investors who have intentions to immigrate to Malaysia. Meanwhile, seldom Malaysians buy Forest City. According to Reuters’ report, 70% of buyers are Chinese.

However, in 2018, Mahathir announced to ban foreigners from buying properties in Forest City, which is a setback for the Chinese developers because they were trying to look for multiple ways to revive the business. The government then cleared that what Mahathir meant is the Malaysian government is going to set a baseline for foreigners who want to purchase properties here, instead of banning them from buying houses in general.

According to Malay Mail, Mahathir later said to local press that “they can buy the property, but we won’t give them visas to come and live here”. Mahathir also explained that Forest City was not built for Malaysians because most Malaysians cannot afford those houses.

If the current government could not solve those leftover problems, more issues and challenges will come up in the future. 


Part III Challenges Under Mahathir’s Government

In Malaysia, although the Pakatan Harapan federal government has been in power for nearly one year, trying to solve the corruption problem and reform the political system, including the appointment of non-Muslims as the Attorney General and the Chief Justice of the Federation, the economy in Malaysia still waits to be improved, so does people’s life standard.

Source: Merdeka Center)

Merdeka Center, an independent polling agency for opinion research, released the latest poll of the Mahathir’s government recently, showed that respondents’ satisfaction with Mahathir’s Performance as the country’s Prime Minister fell from 71% in August 2018 to 46% in April 2019, the public’s satisfaction with the government has also dropped from 60% to 40%.

(Source: Merdeka Center)

At the same time, only 39% of Malaysian voters have given positive comments to the new government. During the same period, the percentage of voters who thought that “the country was heading in the wrong direction” increased from 24% in August last year to 46% in March this year; only 34% of them affirmed the country’s development direction. Besides, The citizens trust in PH to run the economy is declining.

(Source: Merdeka Center)

For these results, the Merdeka Center points out that the decline in rating can be attributed to three main factors: the economic conditions felt by the average consumer, the administrative performance of the government, public’s concern about Malay rights and privileges, and treatment towards other domestic races.

Through the above data and analysis, a year after the re-election, the political and economic situation in Malaysia is still not stable enough. Given the experience of last year, the domestic instability of Malaysia will significantly affect the investment between two countries, such as policy adjustments, exchange rate fluctuations, etc. It can be viewed as one of the largest challenges facing Malaysia and China.

In addition, although the cost the ECRL had been reduced by one-third, it is still a massive part of the burden on Malaysia’s financial position, which also might be dealt as opportunities for corrupt senior politicians to plunder government coffers.

Malaysia’s negative views of China is another big challenge. Wikipedia’s data shows that in 2013, nearly 61.3% (19.5 million) of Malaysian are Muslim. Yueyun Li, Asia Weekly’s correspondent in Malaysia said, “In Malaysia, many Muslim children are sent to study in Egypt and China, deeply influenced by Islam, and they are emotionally inclined to the Middle East. This is why citizens of Islamic countries are visa-free to Malaysia. 

In this way, China should view the relationship with Malaysia from a strategic and comprehensive perspective, taking Malaysia’s ethnic situation into account. “If China really wants to improve relationships, it should give up its great-power posture and give ground on some issues, such as visas,” said Yueyun Li. 

China has been pushing for visa-free access for Chinese citizens, but because of concerns about overstaying Chinese, Malaysia is still reluctant to make concessions on this issue. Taking the example of Taiwan, in order to stimulate tourism, Taiwan provides visa-free access to Malaysian, which not only brought a large number of Malaysian tourists to Taiwan but also enables Taiwan to successfully obtain visa-free access from the Malaysian government.


Part IV The Future of China’ Investments

According to the calculation of sentiment words through R studio, the negative words’ ratio from 2018 Mahathir’s speech towards BRI was as high as 67%. The negative words such as “colonialism” and “war” were generated from the Word cloud system. However, after the second visit to China, Mahathir’s speech towards BRI smooths down. The negative words’ ratio has decreased to 33% in 2019, which shows the relations between the two countries are less intense than before.

As Malaysia’s economy relies heavily on exports, in which field China is one of its largest markets, the improvement of Malaysia-China relations means a lot to Malaysia. But combined with previous investment situation, Kelsey Broderick, a foreign-policy analyst with Eurasia Group said to NIKKEI Asian Review, “Chinese firms will tread more carefully in Malaysia, as they are likely to be under greater scrutiny from both sides.”

In terms of the overall prospects of China’s investment in Malaysia, the Asia Weekly’s correspondent, Yueyun Li said, “The Malaysian market is too small, and its resources are not as rich as Indonesia. Therefore, China won’t attach much importance to Malaysia.”

Look from the strategic position, Malaysia is a vital member of the Association of Southeast Asian NationsASEAN)  and the center of southeast Asia, controlling the strait of Malacca. This means China has to maintain normal relations with Malaysia to safeguard its own interests.

“China’s investment in Malaysia is mainly about infrastructure construction. It’s hard to create job opportunities that Malaysia needs urgently, so I predict that China’s investment in Malaysia will not be flourish.” Yueyun Li added.

However, this is not always the case when it is implemented in a specific enterprise. Last month, in his second visit to China, Mahathir chose Huawei as his first destination with a personal greeting from the founder, Zhengfei Ren. While the United States instigated a “blockade” of Huawei on a global scale, Mahathir’s action shows goodwill to China. 

Biying, a Huawei’s employee in Malaysia said, “Huawei’s share of manufacturers for terminal products in Malaysia has reached 25% or more, which is the highest in the Asia Pacific region, especially in the high-end phone (Mobile phones priced at RMB 4000 and above) field.” Huawei has been operating in Malaysia since 2001. Currently, there are 11 shared service centers in Malaysia, with approximately 2,400 employees.

During the visit, Malaysian government signed the Bandar Malaysia Rework Framework Agreement with China’s IWC-CREC, Malaysian Investment Development Board signed a memorandum of the ECRL Plan with the CCCC, including the construction of industrial parks, infrastructure, logistics centers, and transportation facilities, to strengthen two countries’ cooperation around the railway.

What’s more, according to the agreement, in the next five years, China will purchase additional 1.9 million metric tons of palm oil valued at $1.08 billion, an increase of 20 percent over the original order. Last year, Malaysia exported 30.7 million tons of palm oil to China (about $2.01 billion), down 10.8% from the previous year. 

It was widely regarded as China’s countermeasure to the deterioration of relations between the two countries. To make matter worse, the EU, which accounts for 20% of Malaysia’s exports of palm oil, has earlier announced that it will no longer import it, which makes the Mahathir’s government in the face of economic downturn. Therefore, this purchase plan is also one of the significant trends in China’s investment in Malaysia in the future.

Another possible investment is the Kuala Lumpur–Singapore high-speed rail (HSR) railway, which was postponed by the Mahathir’s government due to high costs, is now expected to resume in late 2020 and completed by 2031. Once the project restarts, “There is a strong possibility that China will participate in the investment.” said Wenwen Xie, an editor of Caixin Globus. 

China’s Alibaba Group Holding and Tencent Holding are also helping Malaysia tapping in the e-commerce sector, developing warehousing technology and mobile payments.

Overall, currently, as Eurasia Group’s Kelsey Broderick said, “Chinese investment, especially involving industrial parks and technology firms, may stand a better chance in Malaysia going forward as the construction of the rail link resumes.”

But in the long term, considering the ethnic composition, market size and resources distribution of Malaysia, China’s diplomatic strategy and various projects that have been postponed before, China’s investment situation in Malaysia is not so optimistic in the future.


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