The unexpected cancellation of the planned Kuala Lumpur-Singapore High Speed Rail (HSR) by Prime Minister Tun Dr Mahathir Mohamad last week has jolted China’s plan to view Malaysia as a strategic centre under its Belt and Road Initiative (BRI) for Asean.

Kuala Lumpur’s expressed intention to renegotiate with Beijing the China-financed RM55bil East Coast Rail Link (ECRL), which is being constructed by a Chinese company, has also caused discomfort among investors.

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It is learnt that many Chinese potential investors are monitoring developments in Kuala Lumpur under the new Government of Pakatan Harapan, which took over the Federal Government after the May 9 general election.

“In an investment forum last week, Chinese investors with plans to set up service and manufacturing firms here said they were not sure what to do after the news on HSR and ECRL,” says Lee Heng Guie, a senior economist formerly with CIMB Group.

The chief economist of London-based The Economist shares similar concerns. “The decision of Malaysia has raised concerns in Beijing, as Chinese firms have committed billions to Malaysia and it has been an important part of China’s BRI,” writes Simone Baptist, who was in the Chinese capital last week.

Due to China’s close ties with Malaysia under the previous government of Datuk Seri Najib Razak, Beijing has been encouraging its investors to treat Malaysia as their favourite destination in their outbound investments.

Tactically, with more Chinese investments in Malaysia, there is a geopolitical chance to prise the strategic country away from the United States.

The influx of FDI from China began about three years ago, after several Chinese construction giants – which have clinched RM300bil worth of building contracts from local major infrastructure projects due to their advanced technology and speed – set foot on Malaysian soil.

A leader of China’s enterprises in Malaysia tells Sunday Star that “many are reviewing” their investment plans now. But according to a Chinese diplomat, Beijing views the Malaysian situation with understanding.

“Dr Mahathir has told Chinese Ambassa¬dor to Malaysia Bai Tian that he supports BRI and rail connectivity, but as the new premier, his priority is to bring down Malaysia’s national debt,” says the diplomat, who declines to be named.

Dr Mahathir has spoken of his concerns over Malaysian borrowing from China, but he has also said “we support the Belt and Road” and that he had written to Chinese President Xi Jinping previously “on the need for the land connection with Europe”.

Before and after the polls, Dr Mahathir has repeatedly said mega infrastructure projects will be cut to pare down the total national debt and liabilities, estimated to be over RM1 trillion by his new administration.

Although the cost of the HSR project was previously stated as RM50bil to RM70bil, Dr Mahathir said the total spending on the project could escalate to RM110bil if construction costs and loan interest are taken into account.

When the railway project was first mooted several years ago, China treated it as part of its BRI plan to build up Asean rail connectivity for economic integration and strategic reasons.

Hence, it came as no surprise when former ambassador to Malaysia Dr Huang Huikang repeatedly said last year that China must win the tender for the HSR job.

A Chinese consortium led by China Railway Corporation, which aims to export its high-speed railway technology to South-East Asia, joined in the bidding for the HSR.

The consortium, consisting of eight China state owned companies, would cover the design, construction, telecommunication, financing, operating and maintenance sectors for the HSR network.

The tender for the 350kph HSR rail project was jointly issued on Dec 20, 2017, by state-owned firms of Malaysia and Singapore. Banking on the development of BRI projects and believing there were good opportunities in Malaysia, many Chinese investments flowed in. This had propelled China to become a leading FDI source in Malaysia last year.

As most Chinese companies believed the Barisan Nasional government of Najib would win the May 9 election, they are now caught in a dilemma.
However, some mainland firms are excited over the new Cabinet of Dr Mahathir and their promises to set up a clean government and rule with transparency and accountability.

The new Government is investigating the RM42bil 1MDB financial scandal and announcing policies seen as beneficial to the country and people.

According to a write-up by Bai Tian last week, three Chinese enterprises have invested RM1.2 billion in Malaysia after the new Government was formed. Ian Yoong, a Malaysian investment consultant for Chinese companies, tells Sunday Star: “China investors are not holding back. I am in Kota Kinabalu for a hotel investment by a Chinese MNC. A preliminary agreement has just been signed.

“There will be parties not agreeable to Malaysian actions. The cancellation of HSR and review of the ECRL are viewed negatively by some. However, these decisions are economic, not political,” adds Yoong.

For the ECRL project, there are allegations that its cost of RM55bil has been inflated and suspicion that some funds from the inflated portion would be used to retire 1MDB debts.

Dr Mahathir told the Edge Weekly recently that the actual cost of construction submitted by China Communications Construction Company was less than RM30bil.

In addition, the terms and conditions on payments are “unusual” as payments are made in China instead of Malaysia. The structure of the ECRL payment to the Chinese is based on a staggered/scheduled payment, as opposed to the common practice of paying based on percentage of completion.

As the cost of cancelling this 13% completed project could be very high, Malaysia has decided to renegotiate the terms. The Chinese Embassy in Kuala Lumpur has declined comment on HSR and ECRL, saying that Beijing has not received any official notification from Malaysia.

But a source tells Sunday Star that Beijing will be prepared to renegotiate the terms of the ECRL, a government-to-government project. To Beijing, the ECRL is a strategic project that it sees as beneficial to both Malaysia and China. The ECRL, once completed, will enable China to bypass Singapore when transporting its exports and imports from Port Klang to Kuantan Port and vice versa.

Kuantan Port, which is near the final stages of deepening, is co-owned by IJM Corporation, the Pahang government and China. Adjacent to the port is the Malaysia-China Kuantan Industrial Park, which has attracted several multi-billion dollar Chinese investments that include Alliance Steel.

Alliance Steel and other existing players are presently using the port to export their manufactured goods to overseas destinations. “Dr Mahathir understands the importance of rail links and connectivity. ECRL is a good project as it has a lot of spill-over effects,” says Dr Ngeow Chow Bing, deputy director of the Department of China Studies in University of Malaya.

“Although the commercial viability of ECRL is being questioned, this is still a bilateral agreement. Other countries are watching how Malaysia handles this legally-binding agreement,” adds the expert on China.

If the contract terms of the ECRL are unfair to Malaysia due to reasons beyond the control of China, it may be in the interest of Beijing to come to an amicable solution with Kuala Lumpur.

China has often said that it wants to strike a win-win situation with its business partners so that their projects can be sustainable. This may be a test case for the superpower.

With the cancellation of the HSR, there is no necessity for Malaysia to go ahead with the Bandar Malaysia project, slated to house the Kuala Lumpur terminus of the HSR.

This planned transportation hub cum property development project, which seven Chinese companies have bidden for, was also seen as part of China’s BRI plan to house Bangkok-Kuala Lumpur HSR terminus.

Beijing had previously mooted the idea of building Bangkok-KL HSR to Malaysia and Thailand. As the new Malaysia is chopping off mega projects, local infrastructure projects where Chinese firms have undertaken contracts or keen to participate may be in jeopardy.

Last week, the Government announced that it had axed MRT3 project in the Klang Valley to save RM40bil in expenditure. As Chinese companies have participated in the construction of MRT2 and MRT1, it is possible they would want to bid for jobs in MRT3 if the latter had gone ahead.

On Wednesday, Business Star reported that the next item on the radar could be the Sabah portion of the RM29bil Pan Borneo Highway, which will cost the Federal Govern¬ment an estimated RM12.8bil for the 1,236km-long segment that will run across the state.

The first phase of the highway across Sarawak and Sabah is due for completion in 2021, but most of the present construction is happening in Sarawak. As the bulk of the work in Sabah has not been carried out yet, it may be easy to defer the project in this state.

Chinese contractors in Malaysia will be affected if this project is deferred, as they are undertaking sub-contracts in some parcels. “As Chinese construction firms are highly competitive, fast and efficient, main contractors prefer to give jobs to them.

“Our companies have to hire Chinese nationals to be workers as most locals do not want to work long hours. This also happens in the case of Alliance,” explains the Chinese diplomat.

The other project that could under come scrutiny is the RM43bil harbour project called Melaka Gateway in Melaka, to be developed jointly by KAJ Developments and energy giant PowerChina International.

Although the project, which includes building three islands off Malacca’s coast, had obtained all approvals in 2013, progress has been slow on the mixed development.

The South China Morning Post, in an editorial last week, said good bilateral ties can be maintained if Beijing and Chinese investors adopt a less aggressive stance towards the new Government.

“Dr Mahathir is known for being pro-Asia and during his time as premier from 1981 to 2003, forged good relations with China,” said the Hong Kong newspaper.

Indeed, these two countries need each other, with China being Malaysia’s largest trading partner for eight years. As the editorial pointed out, “Malaysia needs Chinese investment and infrastructure expertise to develop and it is an important part of the Belt and Road Initiative of China.”

(The star/ANN)