Malaysia’s China Reset

China and Malaysia have a shared trade, cultural, and immigration history that goes back more than 1,000 years, directly connected with each other by ancient Silk Road sea routes through the South China Sea.

Today the relationship is based on trade, investment, and tourism. China has been Malaysia’s largest trading partner for over a decade and Malaysia is China’s third largest trading partner in Asia, just after Japan and South Korea. China invested US$4.75 billion last year and US$43.8 billion over the past 10 years. Rapidly growing Chinese tourism to Malaysia reached almost 3 million visitors last year.

China over the past seven years under General Secretary Xi Jinping, a neo-Maoist in his vision of a great revival of the Chinese nation, has been reasserting its place in the world. Xi, an inspired Leninist in his view of the importance of the state, has focused his government’s activities on spreading trade, investment, technology and culture with an appropriate military presence across the world in pursuit of what is dubbed the Chinese Dream.

The Barisan Nasional government headed by now-ousted and disgraced Prime Minister Najib Razak enthusiastically embraced China’s initiatives, signing up for an unprecedented number of projects. These included the Kuala Lumpur-Singapore High-Speed Rail (HSR), the Melaka Gateway Port development, Kuala Linggi Port expansion aimed at taking away some of Singapore’s port business, waterfront land reclamation in Penang, a Green Technology Park in Najib’s home town of Pekan, a methanol Plant in Sarawak fully owned by the Sarawak state government and the Trans Sabah Gas Pipeline. Another BRI project, the East Coast Rail Link (ECRL) would connect the new Pahang Port extensions on the east coast to Port Klang on the west and cut around 30 hours from time over ships going around Singapore.

More than 160 private Chinese investments also came to Malaysia along with the US$100 billion Forest City on the coastline adjacent to Singapore. Chinese investment into the Bandar Malaysia project at the old KL Airport site was regarded as a bailout of the scandal-ridden 1MDB, assisting the beleaguered Najib.

China was caught by surprise when the Pakatan Rakyat coalition led by retread Prime Minister Mahathir Mohamad defeated Najib in the general election, losing Najib as a close ally to Mahathir, who had campaigned strongly against Chinese foreign investment.

Abruptly after the election, Mahathir cancelled or deferred a number of Chinese projects and went on to restrict the Forest City project by saying that visas will not be issued for foreigner owners of properties within the project.

For China Mahathir first appeared a dilemma. The straight-talking premier while on a visit to the Philippines warned President Rodrigo Duterte about being caught up in debt. Just recently Malaysia seized US$240 million from the bank account of a state-linked Chinese pipeline contractor for “work not done.”

Many commentators have hailed Mahathir’s move as fighting back against China. Perhaps a better metaphor would be that China and Malaysia are playing ping pong democracy. The relationship between the two is robust and China is well aware Mahathir’s narratives are primarily for domestic audiences. However, there are also subliminal messages for China. Mahathir never directly blamed China, but rather blamed Najib for entering into projects without doing due diligence. Cost, affordability and lack of benefit to Malaysia were the official reasons Mahathir gave for cancelling the projects.

The behind-the-scenes communications with China were symbolic and at first unofficial. Jack Ma, head of the Chinese internet powerhouse Alibaba and a member of the CCP visited Mahathir in Putra Jaya very quickly after the election. Mahathir’s closest confident Daim Zainuddin made an unofficial trip to meet China’s premier Li Keqiang, a couple of weeks after Jack Ma’s trek.

Mahathir’s visit to Japan before visiting China didn’t go unnoticed. On Mahathir’s first visit to China after becoming PM, China accepted cancellation of the projects. Even with the cancellations, the visit was deeply symbolic where great respect was accorded to Mahathir. During the trip, Mahathir visited Alibaba and Greely which had just taken up 49 percent equity in Proton, the struggling national car dear to Mahathir’s heart.

With a reset relationship, Mahathir returned to China in April this year. Some of the projects had been renegotiated and Bandar Malaysia and ECRL were revived. Mahathir publicly expressed his full support for the BRI development strategy. His visit to Huawei headquarters stating Malaysia will continue working with the company on 5G development was important support against US criticism of the company. Malaysia also signed a major palm oil export deal that will offset the loss of palm oil exports to the EU. These events showed a very strong two-way relationship.

Mahathir thus dealt with the Chinese in a way they understood. His visit to Japan showed his displeasure over China’s explicit support for Najib and told the Chinese that Malaysia has other strong regional friends. His rebuke of China’s investments projects in Malaysia was not totally taken as an affront to China’s interests, as China itself had restricted capital outflows for the Forest City project. Mahathir’s calls for due diligence and transparency in BRI projects have even enhanced China’s credibility on BRI in the region, which has been strongly criticized, somewhat unjustly in some corners of the media.

The Malaysia-China reset has created a number of understandings. State-to-state relations are of the utmost importance because the majority of China’s Malaysian business partners are related to the state in one way or another. Future investments will be scrutinized as to their benefit to Malaysia. Under a Mahathir government, these investments will be transparent, unlike those entered into by his predecessor. Malaysia is not an easy place to do business in, even for China. China must take into account political power, various relationships between the stakeholders and public narratives.

The China-Malaysia relationship also hinges on many unsaid givens. Mahathir’s realism about the South China Sea is a thousand years of what has been. He rejects the occidental views of parties outside of the region, which saves enormous amounts on what he believes is unnecessary defense spending.

The BRI is China’s best asset to contest US regional influence, particularly as US Asia policy is in disarray, especially with the US withdrawal from the omnibus TransPacific Partnership trade agreement.

The China-Malaysia reset comes at a time when there is much discussion about growing Chinese influence around the world, following a pattern not too unsimilar to how US influence grew around the world after WWII through aid, cultural exchanges, propaganda, trade, investment, military expansion, espionage, and covert military operations.

The issues are much more complicated today as there are so many Chinese migrants that have integrated into their host societies around the world. Most of these people still carry strong affections for China. The loyalties of people with dual cultural ties are much more complex in regards to the integrity of national security. These issues must be considered very early on, not after the horse has bolted. Potential threats to national security can come from any wave of migration.

It’s the host countries that invited the migrants. It’s the host countries that have invited Chinese investment. Mahathir has pointed out that it’s the responsibility of the host country to carry out their own due diligence on the decisions they make in regard to foreign investment. If a country’s government is corrupt or decision-makers compromised, then the country will get into trouble. There is plenty of evidence to support this assertion.

Mahathir may have given a lesson to China about meddling inside domestic politics, especially during the last federal election. The China-Malaysia case also shows that dealing with China shouldn’t be of a transactional nature. The importance of symbolism, diplomacy, and a little bit of hardball can’t be underestimated. China has a massive PR job ahead of it on BRI, especially with the slant much of the media has given the subject. Although mistakes have been made, beyond the controversies there is a vision. The US may not be China’s main competitor within the region, it might be China’s own ghost.

Murray Hunter is a development specialist based in Southeast Asia and a frequent contributor to Asia Sentinel