April 4, 2017
Malaysia-China Relations: Not China but we are the financially irresponsible and reckless nation
Malaysia’s sudden, new-found amour with China in a plethora of business deals worth hundreds of billions, coming in the wake of the 1Malaysia Development Bhd (1MDB) scandal where RM40 billion is already at risk or wasted, is tremendously worrying.
The huge amount of China borrowings that will accompany such deals, with delayed payment for up to seven years in some cases, will put the country in grave economic danger in the future as many of the infrastructure projects are not viable.
If some of the projects do not raise enough cash flow to start repaying the massive borrowings by the time payments are due, a great strain will be imposed on the country’s financial position and may even result in it becoming unable to meet its obligations, leading to default.
Already, the involvement of China state-owned firms in 1MDB-related projects such as buying power assets and taking stakes in property development ventures have raised legitimate fears that some of these may involve quid pro quo arrangements in other deals which may benefit Chinese firms.
In other words, putting it bluntly, Malaysia may be giving China plum deals in return for help in covering the hole of over RM30 billion in 1MDB. More on that later but first, here’s a list of some mega deals made.
1. Purchase of 1MDB’s power assets for RM9.83 billion cash in November 2015.
The purchase was made by China General Nuclear or CGN, putting power assets which were purchased from Malaysian private hands into a China state company. That rubbishes any claim that 1MDB was a strategic development company. The price was considered inflated, leading to speculation that other projects will go to China to compensate for this.
2. Purchase of 1MDB land for RM7.4 billion.
Less than two months later, on New Year’s Eve in 2015, 1MDB sold a 60% controlling interest in Bandar Malaysia to a consortium comprising Iskandar Waterfront Holdings and China Railway Engineering Corporation, a China state company. The latter holds a 40% stake in the venture. This is a highly questionable deal surrendering control of one of 1MDB’s two flagship projects to others, including a China company, when there is enough local property development expertise. It lends credence to there being a quid pro quo deal with China.
3. China is expected to get high-speed rail project costing RM40-80 billion.
The high-speed rail project between Kuala Lumpur and Singapore is expected to go to a China firm despite international tenders being planned. Interestingly, the Kuala Lumpur terminus is at Bandar Malaysia.
4. The RM55 billion East Coast Rail Link (ECRL) project announced in November 2016.
China will both fund and build this project which has a seven-year delayed payment provision. Essentially a double-tracking project linking the east coast states with the west, there has been no economic viability study on it. There are genuine fears that the construction cost is terribly overstated and it is unviable.
5. A proposed RM200 billion port development in Port Klang.
China is supposedly in the running for this massive project if it does see the light of day. This is a long-term project which again may be unnecessary considering the number of ports being developed concurrently now.
6.The RM42 billion Melaka Gateway project in September 2016.
This includes four islands – three man-made, in a RM30 billion deal with China companies – a port, a bulk-and-break terminal, ship building and ship repair, mixed development, shopping complexes, ferry terminals, marina and so on. Where is the demand for these going to come from?
7. The RM400 billion gross development value Forest City off Johor.
This massive development on four man-made islands, which may eventually house 700,000 people, is being developed by a China company, effectively in a joint venture with the Johor Sultan. Considering that it is a property development which local players could easily have undertaken, what is the rationale for bringing in yet a Chinese company into this?
Not for altruistic reasons
There are more. Prime Minister Najib Abdul Razak, after a visit to China in November, came back with memoranda of agreement for RM144 billion worth of projects. That list includes ECRL and the Melaka Gateway projects but not the others, which means there are several more projects worth tens of billions of ringgit.
What is very alarming about these projects is their dubious economic value, leading to strong suspicion that they could well be related to covering a hole of over RM30 billion in 1MDB – the Auditor-General’s Report on 1MDB reportedly says US$7 billion could not be accounted for.
In fact, the Financial Times of the UK reported in December that 1MDB is preparing to make a repayment with Chinese assistance to Abu Dhabi’s state-owned fund in settling a US$6.5 billion (RM28.6 billion) dispute over an alleged breach of contract.
The move to begin repaying what 1MDB owes Abu Dhabi’s International Petroleum Investment Company (IPIC) was confirmed by two people familiar with the matter, the FT said.
Najib Razak and Big Momma
China has been approached as a source of funds for 1MDB, the FT said, citing three people with knowledge of the matter, one of whom said Malaysia would swap assets for financing.
China is of course not doing all of this for altruistic reasons but to further its own interests. First, it aims to get work for its companies and sometimes its own people – it sends in its own workers for many projects.
Two, if countries are unable to repay their debts, then more assets will have to be handed over to China and the affected countries become ever more indebted and linked to China in other ways, furthering China’s aim of strategic and military influence, as this article titled ‘China’s debt-trap diplomacy’ eloquently points out.
As a small country, Malaysia has been rather adept at playing the role of the nimble kijang or deer which keeps itself from getting crushed when elephants fight. But 1MDB’s problems may be leading us down a path which is even more dangerous than the garden path the so-called strategic development company led us up on earlier.
P GUNASEGARAM says throwing good money after bad is a lousy deal which only the desperate make. Email: email@example.com.