Chinese FDI in Malaysia: A blessing, curse or opportunity?

Malaysia has become the 4th-largest recipient of China’s ODI globally in 2017, a surge from 20th rank in 2015

AS WE draw near the 14th General Election (GE14), the echo over Chinese investment in Malaysia is rising. One side calls Chinese foreign investment a blessing for the country and the other side terms it as a curse. It’s time to look more closely beyond these simplistic, and mostly misleading generalisations.

Malaysia became the fourth-largest recipient of China’s overseas direct investment globally in 2017, a surge from 20th rank in 2015.

In a short span of two years, foreign direct investments (FDIs) from China into Malaysia have skyrocketed — from RM1.5 billion in the first quarter of 2015 (1Q15) to almost RM15 billion in the 4Q17, according to the Department of Statistics Malaysia.

The pipeline of Chinese FDI in Malaysia has reached to US$11.61 billion (RM46.44 billion) and is growing. The list includes Kuala Linggi International Airport (US$2.92 billion), Kuantan Port Expansion (US$900 million), Robotic Future City (US$3.46 billion), Samalaju Industrial Park Steel Complex (US$3 billion), Waterfront Land Reclamation (US$540 million), Green Technology Park Pahang (US$470 million), The Shore Sabah (US$130 million), Methanol Derivatives (US$190 million) and the East Coast Rail Link, or ECRL (US$13 billion).

Are these Chinese investments, largely parked in the construction and infrastructure sectors, helping to create local linkages?









Data is sparingly available. However, in an interview conducted by our research team, it was revealed that trickle-down is taking place.

For instance, in the Kuantan Port and Malaysia-China Kuantan Industrial Park project, a local company was engaged in the construction of a factory in the industrial park and even this was done through an open tender.

While this may not be generalised, this certainly shows that Chinese FDIs can have positive externality for the Malaysian economy.

Another example is the Malaysiabased building material firm Lafarge Cement Sdn Bhd, which has secured a RM270 million (US$68.92 million) cement supply contract for the ECRL project, of which the construction is led by China Communications Construction Co Ltd (CCCC).

According to an article by the World Economic Forum, the investment policy of China is also changing.

The new policy explicitly encourages Chinese enterprises to work with local businesses in sectors like logistics, electricity and information systems, and it promotes interaction among businesses, communities and government leaders.

Now, let’s look at the trade account between China and Malaysia as trade and investment are closely related.

For years, Malaysia was one of the few Asean countries that invested more in China than China invested in it. Flows of Malaysian FDIs into China grew from US$251 million in 2003 to over US$400 million in 2009, at which point the trend reversed.

By 2013, flows of Malaysian FDIs into China stood at US$280 million, while flows of Chinese FDIs into Malaysia reached a new high of US$616 million, and as I noted earlier, they had reached to almost US$4 billion by the end of 2017.

In terms of trade, Malaysia has enjoyed surplus vis-à-vis China, that began to reverse in 2012.

In terms of trade, Malaysia has a negative net export from China since 2012. As of 2016, the net export was (-) RM43.81 billion. As the following graph shows, imports from China have been constantly rising, but exports have not.

In fact, exports to China have started to decline. The gap is telling. The reversal of investment and trade flows between China and Malaysia may not be just coincidental.

When Malaysia invested more in China than China invested in Malaysia, it also enjoyed a trade surplus. However, soon after the investment flows began to reverse, trade flows also reversed.

This article is not an ideal place to comment on this relationship, but it can be debated later. It is certainly a matter of economic policy, which should not be coloured with a political lens, as this will not help anyone.

One should hope that Malaysian leadership, regardless of the political divide, will be able to convince the Chinese side to create more synergistic relationship between Chinese investors, both state owned and the private, and Malaysian counterpart firms and agencies.

The investment and trade relationships must continue to grow with wide scale dispersal of benefits across the economy.

Trade and investment are not a zero-sum game and long-term benefits must outweigh long-term costs. But transparency in contracts and transactions is fundamental to win confidence.

It not only wins the confidence of investors, but also of voters. In the run-up to GE14, Malaysian political leadership must learn this fundamental lesson.

The author is acting CEO of IDEAS (Institute for Democracy and Economic Affairs).