China’s Economic Rise: Opportunities and Challenges to Malaysia’s Economy

Introduction

According to Bloomberg (2017), it was reported that, “China is already the world’s largest economy and has surpassed the U. S. ”. This implies that China can be considered as a formidable superpower in terms of economy supremacy. With an average GDP growth of 10 per cent a year over the past three decades, it is not an understatement to suggest that China would remain to be the largest economy in the world for the foreseeable future. This economic growth has attracted a lot of debate around the world, with the availability of investments opportunities as well as threats posed by China in terms of economy and security.

However, these doubts and concerns were viewed differently by then Malaysian Prime Minister who believes that. “China’s economy growth and current WTO accession will magnify challenges and expand the opportunities rather than seen as a threat to the Asian regions in terms of economy and security”. Under the premiership of Tun Mahathir, the current Prime Minister of Malaysia pointed out that Malaysia will forge better ties with China as this would bring mutual benefits for both sides by focusing on economic development rather than confrontation. This paper will attempt to understand and highlight the opportunities and challenges that arise from China’s economic rise and its impacts on Malaysia’s economy under the new administration.

China’s Economy

Over the past three decades, China’s economy has been impressive. Gross Development Product (GDP) grew at an average of 10 per cent a year, and over 500 million people were lifted out of poverty (The World Bank, 2013). In the first quarter of 2018, China’s economic activity is expected to remain resilient, with GDP growth by 6. 8 per cent. However, the long-term trend is projected to be slower due to slower investment growth while consumptions remain to be the main drive of its economy. Nevertheless, it GDP growth is forecasted to moderate to 6. 5 per cent in 2018 and at an average of 6. 3 per cent in the next two years (China Economic Update, 2018). While its economy is expected to remain stable in the foreseeable future, one of the big challenges for China’s economic development would be the on-going trade wars between itself and the United States of America.

According to South China Morning Post (2018), China views the trade war to be a long and challenging battle and stated that U. S. views China as a major threat to its ‘America First’ strategy. Based on this situation, it remains to be seen whether any resolution would exist between both sides. How would this situation impact Malaysia’s economy?

Malaysia’s Economy

Among the ASEAN Member States, in 1974, Malaysia was the first country to establish diplomatic relations with the People’s Republic of China (will be referred as PRC from here onwards). Through ASEAN, Malaysia has enjoyed a positive economic relationship with the PRC, particularly after the ASEAN-China Free Trade Agreement (ACFTA) came into force in 2010. During its early days, ACFTA was the biggest free trade area in the world with a combined population of 1. 94 billion and combined GDP if more than USD 9 trillion. The historical result of Malaysia’s recent election provides an unparalleled opportunity for change. Under the new government, Malaysia’s economy policy framework is mainly guided by its election manifest Buku Harapan.

According to World Bank (2018), Malaysia’s economy is forecasted to grow at a rate of 5. 4 per cent in 2018, backed by stronger growth of household consumption. Currently, the primary drive of its economy is the private consumption, which is forecasted to accelerate at a rate of 7. 0 per cent in 2018. It is also reported that Malaysia is on track to achieve its shift from an upper middle-income economy to a high-income economy within the next two to six years. In 2017, its Gross National Income (GNI) stood at US$ 9,650, or US$ 2,405 below the threshold level of US$ 12,055 that the World Bank currently sets to define hihg-income country status. With regards to the impacts of trade wars between China and U. S. , it was widely reported that this situation may have a negative impact on Malaysia’s economy through pressure on its external trade volume.

At this rate, if the trade war continues to worsen in the next two years, Malaysia could fall into a recession and would record negative GDP growth. However, according to Tun Mahathir (2018), Prime Minister of Malaysia was of the view that Malaysia will likely benefit from the situation in terms of attracting foreign investors. Tun Mahathir further stated that economic policies implemented in this trade war would benefit investors who could not invest in certain countries, thus benefiting countries that were not involved in this trade war.

China’s Investments and Trades Performance with Malaysia

Since 2013, China introduced its “One Belt, One Road” (OBOR) initiative, which was subsequently rebranded as the “Belt and Road Initiative” (BRI) initiative. From Southeast Asia to Eastern Europe and Africa, BRI includes 71 countries that account for half the world’s population and a quarter of global gross domestic product. The Belt and Road Initiative is expected to cost more than US$ 1 trillion, although there are differing estimates as to how much money has been spent to date.

According to an analysis, China has invested more than US$ 210 billion, majority in Asia. Nowadays, the money flows into Malaysia recorded an increase in Chinese investments of 1,064% from 2012 to 2015 (See Chart 1 and 2) China is expected to continuously affect the growth trends of Malaysia’s economy due to its rapid economic growth and size of the economy. This is evident through an increasing number of Malaysia’s capital goods and investment, components and sub-assemblies, parts, as well as primary products that have been imported by China.

In essence, China’s foreign direct investments are tremendously important to Malaysia’s economy. According to Ministry of Trade and Industry (2018), Malaysia’s trade with China absorbed 17. 3% of Malaysia’s total trade and expanded by 19. 4% to RM28. 31 billion in July 2018. Malaysia’s exports to China remained strong and recorded the highest monthly export value of RM12. 92 billion, a 37. 5% growth compared to 2017. This was attributed to higher exports of electrical and electronic (E&E) products, chemicals and chemical products, liquefied natural gas, petroleum products and crude petroleum. In the first seven months of 2018, Malaysia’s total trade with China expanded by 8. 9% to RM177. 49 billion compared to 2017. Total exports to China were stronger by 12. 1% to RM77. 48 billion, attributed to higher exports of E&E products, chemicals and chemical products, manufactures of metal as well as optical and scientific equipment. Malaysia’s imports from China also rose by 6. 6% to RM100. 01 billion. Despite Malaysia’s overall welcoming stance towards increased foreign direct investments and positive trade performance, there is a considerable domestic dissent towards the increasing presence of Chinese investment in the country.

Challenges Federal Government Debt

Besides growing trend of dissent towards Chinese investment, another challenge would be the increasing amount of Malaysian federal government debt and liabilities exceeding RM1 trillion. As illustrated in Chart 3 below, federal government debt consisted of RM686. 8 billion (50. 8 per cent of GDP), government guarantees consisted of RM199. 1 billion (14. 6 per cent of GDP) and lease payments for public-private projects of RM201. 4 billion (14. 9 per cent of GDP). In regards to this large amount of debt, Tun Mahathir blamed his predecessor Dato’ Seri Najib Razak for pushing Malaysia into a debt traps and said the following: “They borrowed huge sums of money and now we have problems trying to repay the money that they have owed. That is not foreign direct investment. ” The biggest example is the East Coast Railway Line (ECRL). State-owned China Eximbank will provide MYR 55 billion for the project. Malaysia will only start repayment after seven years when the construction is expected to be completed, and over a period of 20 years. The Malaysian government will act as guarantor to Malaysia Rail Link Sdn Bhd, a special purpose vehicle created by the Malaysian government to receive the soft loan and oversee the delivery.

However, it has already been announced that the main contractor tasked with constructing the ECRL is another PRC state-owned enterprise, the China Communication Construction Company (CCCC). There is a requirement that CCCC must subcontract some portions to local companies, but the bigger picture remains in which Malaysia borrows money from the PRC and will immediately use a large sum of that money to pay a PRC company. After seven years, Malaysia will still need to pay back the loan plus interest, again, to the PRC. Not only does the PRC get back a substantial portion of their money immediately in the form of payment for work done by their state-owned enterprise CCCC, they will get more money when repayment starts with interest. Ultimately, over the long term, there is still an outflow of funds from Malaysia to the PRC.

This will occur even if the ECRL is not profitable, because the risks and the liabilities are borne by Malaysian taxpayers through government guarantee of the loan. Tun Mahathir further stated that the government will relook into these borrowings and related projects which in any case would not be beneficial for Malaysia’s economy. Malaysia would need to avoid the situation that has happened to Venezuela. China gave Venezuela a soft loan of US$ 63 billion between 2007 to 2014, and the repayment was supposed to be with oil. When the price of oil more than halved over that period, Venezuela’s repayment cost doubled. China refused to renegotiate the terms of what was supposed to be a soft loan, leading a commentator to say “Venezuela’s road to disaster is littered with Chinese cash. Since 2013, Venezuela’s economy has been in a dire state, with high inflation and difficulty repaying its debts. If China wants the BRI to succeed in countries like Venezuela and Malaysia, it must ensure that costly infrastructure projects do not harm these countries’ economies.

Otherwise, trade and investment between them and China will suffer. According to The Guardian (2018), the Center for Global Development found eight more Belt and Road countries at serious risk of not being able to repay their loans. These nations include Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro, Pakistan and Tajikistan, all of which are among the poorest in their respective regions and will owe more than half of all their foreign debt to China.

Forest City Project

According to Bloomberg (2017), the Forest City project in Johor is a Malaysian version of Shenzhen, which is largely backed by Chinese developers and buyers with hotels, offices, golf courses, tech parks and large numbers of new apartments. The 20-year project was announced in 2006 and envisaged a total investment of RM383 billion (US$87 billion). This metropolis is projected to house 700,000 people, initially expected to be mostly from China. It opened its second international sales office in a high-end neighbourhood of Kuala Lumpur at the end of 2016, and more sales galleries are planned for Taiwan, Myanmar, Dubai and Indonesia. Middle-class Chinese who are unable to afford housing in expensive Chinese urban centres such as Beijing and Shanghai have been the main targeted clients for this development. Recently, Tun Mahathir made a remark against the developments of Forest City project and said that he would support the wishes for houses in the Forest City Project to be sold to foreigners if the developer wants Malaysians to live in wooden houses. This remark indicates that Tun is genuinely concerned on priorities of developer in producing affordable houses for Malaysians. The Edge Markets (2018) reported that Forest City will look into building affordable housing that is tailored to local needs. It is expected that the developers would produce such affordable houses for the locals in the next three years.

However, it still remains to be seen whether such affordable house projects would come to fruit without any plan of actions. South China SeaBoth China and Malaysia contest parts of the South China Sea north of Borneo. It was widely reported that China has militarized at least three features in the Spratly Island chain. For Malaysia, it is particularly active in drilling near those islands for undersea oil and natural gas. It is expected that China will probably adopt a pragmatic approach to Malaysia’s new stance rather than resist it. Both countries would want their joint investments to work out. If China became more aggressive at sea, Tun Mahathir would probably publicize the act rather than letting it go. The more aggressive China is in the disputed area, the more vocal Malaysia would be seen in the international arena. Moving forward, Malaysia should be bold in calling for demilitarization of occupied features, a halt to the permanent stationing of warships near claimed features, and a moratorium on the conduct of provocative naval exercises in the South China Sea. That being said, analysts stated that Tun Mahathir's more assertive stance on the South China Sea is unlikely to amount to a challenge to Beijing, which is Malaysia's top trading partner.

Analysis

China with its huge size and rapid economic growth is both a competitor and ally within the Southeast Asian region. It is a competitor because of its low labour costs and abundant supply of quality labour. However, China also provides ample opportunities for Southeast Asia to be a partner in economic growth. Firstly, Southeast Asia is richly endowed with natural resources in which China is lacking. With its rapid economic growth, China's demand for natural resources, especially energy, has been on the rise and in this respect, Southeast Asia plays a complementary role to the economic development of China. Conventionally, China’s foreign direct investment brings in capital and creates employment as well as technology transfer prospects. Chinese investment in Malaysian manufacturing has the same potential as other foreign direct investment to contribute towards economic growth through employment and technology transfer. The extent of technology transferred depends on a complex mix of absorptive capacities of local firms and workers, global and regional strategies of the multinationals involved as well as host country policies. Based on the above, it is evident that Malaysia and China had a positive trade and investment relations.

Since 2009, China continues to be the top trading partner and investor for Malaysia. With regards to BRI investments, Malaysia has the best opportunity to benefit from it as this would enhance Malaysia-China bilateral ties, as well as improve relations connectivity between the people in the two countries. However, Malaysia needs to be wary on its impacts and challenges to avoid falling into a debt trap as what had happened with Sri Lanka, who struggled to its debts to Chinese firms and resorted to formally handed over the strategic port of Hambantota to China on a 99-year lease last week, in a deal that government critics have said threatens the country’s sovereignty. During his visit to China this year, Tun Mahathir even stated that “We do not want a situation where there is a new version of colonialism happening because poor countries are unable to compete with rich countries.

” Malaysia should be wary that China would use its debt-trap diplomacy to extract strategic concessions such as over territorial disputes in the South China Sea or silence on human rights violations. All this has led to Tun Mahathir’s announcement of postponing China’s projects in Malaysia which include an East Coast Rail Link and two energy pipelines. In response of the postponements of projects by Malaysia, a Chinese foreign ministry spokesman said, “Of course, cooperation between any two countries may encounter some problems, and different views may emerge at different times. These problems should be properly resolved through friendly consultations without losing sight of the friendship enjoyed by the two countries and the long-term development of bilateral ties, which, I can assure you, is also an important consensus reached during Prime Minister Mahathir’s visit to China. ”

Conclusion

Even though there is a rise in concerns on Chinese investments in Malaysia, it is ineffective to think that the flow of investments into Malaysia should be curtailed. These investments should not be viewed as a problem as China is currently the world’s largest economy and has capital power to further enhance the economies of friendly and neighbouring countries in the region. Even though challenges would arise from the impact of China’s investments, Malaysia should continue to take this opportunity to utilise this and enhance its economy to remain competitive and sustainable in the ever changing international environment. The Malaysian government should be well equipped in tackling issues instead of being reactive in coming up with recommendations in line with its aspirations and goals to enhance good governance. China is expected to move forward in its pursuit of global economic dominance as they have the capacity to do so.

Thus, Malaysia is needs to maintain its friendliness towards China to ensure that its interests are aligned in its desires which are enshrined under the New Economic Model and the Economic Transformation Programme. The responsibility to ensure good governance lies under the leadership of the new administration in practising transparency and priorities of its people. It is with fervent hope that the Malaysia government would be able to assess the opportunities arise from Chinas investments as well as tackling issues and concerns that came along with it.