Friday, May 19, 2017

Chinese deals in Malaysia under scrutiny

May 7, 2017

China's growing involvement in Malaysia has been praised and panned in recent years. The Sunday Times looks at how its widening presence is drawing increasing attention in the first of a two-part series. Tomorrow, why the promise of new ports in Malaysia with help from China may not materialise.

Shannon Teoh Malaysia Bureau Chief and
Trinna Leong Malaysia Correspondent In Kuala Lumpur

The slew of projects and investments by China's state-owned enterprises and their soft loans have been a major talking point in Malaysia since 2015, when they helped prop up state fund 1Malaysia Development Berhad (1MDB), which was burdened by huge debts.

China's deep financial involvement in Malaysia came under fresh scrutiny last week with the collapse of the Bandar Malaysia township deal.

TRX City, formerly a unit of 1MDB but now taken over by the Ministry of Finance, aborted the RM7.41 billion (S$2.4 billion) agreement with a Malaysia-China joint venture firm.

Prime Minister Najib Razak was slated to make a landmark visit to the Bandar Malaysia site, at the edge of downtown Kuala Lumpur, last Wednesday - the same day the deal was aborted.

Signs of trouble came just hours before Datuk Seri Najib was expected to arrive, when the owners of the RM150 billion project began receiving calls from VIPs asking if the 5pm event was cancelled.

This was the first time even senior executives at TRX City had heard about such a possibility that would see hundreds of thousands of ringgit wasted on a lavish non-event. A TRX City staff member told The Sunday Times: "We heard about it only from external parties. My colleagues were at a loss for words."

Later that evening, the firm announced that the sale of 60 per cent of Malaysia's signature 197ha township had been scrapped.

The joint venture firm, made up of Malaysia's Iskandar Waterfront Holdings (IWH) and China Railway Engineering Corp (CREC), is contesting the government claim that it failed to pay up according to an agreed schedule, despite getting more than 10 extensions.

This is amid reports that the deal soured due to other demands by the Chinese side, including alleged preferential treatment in the Kuala Lumpur-Singapore High-Speed Rail, which is set to have a terminus in Bandar Malaysia.

There are numerous theories as to why Mr Najib decided to cancel the deal. But the main thread has been that China wanted more than Malaysia could give.

Deals worth hundreds of billions have been inked with China since Malaysia was rocked by the 2014 oil price crash, culminating in RM144 billion worth of deals unveiled by Mr Najib after a one-week visit to Beijing last October. But these agreements have now come under scrutiny after the government aborted the Bandar Malaysia sale.

This deal was to be the flagship Malaysia-China partnership, having been brokered at the government-to-government level, like many other projects aimed at boosting a stuttering economy.

Its cancellation deflated optimism in recent months of a Chinese investment theme, as investors withdrew from construction and other companies related to this China play on the Kuala Lumpur Stock Exchange.

The Sunday Times understands that other China-linked deals, especially those which have not even reached the stage of legal agreements like the Bandar Malaysia case, are also being held up due to a mismatch in expectations.

There are also other direct drawbacks, analysts and stakeholders said. Chinese businesses are protective of their value chain, from materials to workers to even the use of language.

At Xiamen University Malaysia - the first overseas campus of the famous institution - in Sepang, Selangor, even canteen staff are Chinese nationals. The menus are in Chinese, and orders are made in Mandarin. This naturally reduces the multiplier effect on the Malaysian economy.

SME Association of Malaysia president Michael Kang told The Sunday Times that Chinese firms' ability to price themselves lower should help Malaysia improve its competitiveness.

"But if locals don't meet the requirements, they (Chinese firms) should at least do capacity building so we meet their standards," he said of the Chinese reluctance to use Malaysian vendors.

Mr Najib's Umno party is headed by warlords who are also mostly big project contractors who depend on major government projects. But the projects have now been carved out by these Chinese companies.

If the gravy train stops, the loyalty of the warlords to Mr Najib as Umno's president may also shrink.

Said University of Tasmania's Asia Institute director James Chin: "The big boys know they would have to change the way they collect rent. The elites would need to figure out a new way to make money. The problem is how."

Speed and scale of Chinese contractors ignite fear in Malaysia

For the past decade, China's investments and loans in Malaysia have created a political storm, with critics like former premier Mahathir Mohamad worrying that the country will have to pay a hefty price in exchange for money.

The recent breakdown of the Bandar Malaysia deal set tongues wagging that Chinese funds often add conditions to their deals.

But for Malaysian businessmen, the presence of mainland Chinese comes with another worry.

They told The Sunday Times that the Chinese tend to bring along their own skilled and unskilled workers, importing supplies such as steel and machinery from China, and carrying out projects with a speed and scale unmatched by most Malaysian companies.

Their massive presence in Malaysia is seen not just in Johor, where projects such as Forest City often capture headlines. In Kuala Lumpur, banners in Chinese are plastered on boards at construction sites where the city's newest skyscrapers are being built.

State-owned Chinese firms constructed and invested US$35.6 billion (S$50 billion) worth of projects in Malaysia from 2010 to 2016, according to the World Bank and Statistics Department of Malaysia. However, with China imposing capital controls earlier this year, the investment inflow is likely to dip.

Years of sudden and rapid development, coupled with the massive scale of Chinese firms, have ignited fear among Malaysian businesses.

Datuk Michael Kang, president of the SME Association of Malaysia, said: "The problem with China is that it will own and control the entire supply chain."


Malaysia has always welcomed foreign investments, with the government's open policy helping to boost economic growth via manufacturing in the 1990s, with countries like Japan and the United States setting up factories locally.

According to Malaysian business owners, Chinese firms would typically operate independently, with little inclination to get skilled local workers and raw materials from Malaysian companies.

"China comes here with a volume game. Of course, local businesses are worried about the competition," said Datuk Kang.

Malaysia's imports from China have doubled in the last decade, surpassing Malaysia's exports to the country from 2012 onwards.

The uneven trade between the two nations stems from 25 per cent of last year's imports consisting of items linked to construction, according to data from the International Trade Centre.

In 2014, during a surge in the number of Chinese construction firms and developers entering Malaysia, imports of contractors' plant and equipment from China amounted to almost RM883 million (S$285 million).

With steel imports from China amounting to 8 per cent of total Chinese imports last year, Malay- sian steel companies said they cannot compete with the Chinese output volume. "China developers and contractors link up with Chinese millers, and have been buying steel from them, until the governments imposed rules" to slow this down, said Datuk Soh Thian Lai, president of the Malaysian Iron and Steel Industry Federation.


Not only have Chinese firms entered Malaysia as investors, but they are also hired as contractors tasked to build some of the country's projects. One example is the 106-floor Signature Tower at Tun Razak Exchange in Kuala Lumpur.

Just 3km away, there are construction works for Four Seasons Hotel and M101 Skywheel. These projects are not owned by the Chinese but involve contractors from China's state-owned companies.

With the strong Chinese presence, Malaysia's ruling party may need to play a balancing act, juggling between the Chinese big boys and disgruntled Malay contractors whom it needs for political support.

Observers said Malaysia would have to draw up regulations ensuring that some local content is included in large-scale government projects. A RM55-billion railway line linking Kuala Lumpur to the east coast will be built by a Chinese firm. The government says 30 per cent of the work would involve local contractors as part of the agreement with mega-builder China Communications Construction Company.

Still, some people think the added competition is good for Malaysia. "What it does is to undercut the cronies," said a fund manager, who declined to be named.

Malaysia's business practices, long accused of lacking in transparency in contract awards and deals given to crony firms, may benefit from a forced revamp.

"They'll have to either adapt, pick up or do something else to survive," said Mr Oh Ei Sun, a senior fellow at the S. Rajaratnam School of International Studies. China has revolutionised the construction process. We are no match. Malaysian firms can fill in the gaps and upgrade themselves."

Chinese firms harbour doubts over Malaysian port projects

MAY 8, 2017

Cash-strapped Malaysian players are instead driving plans, hoping to get leg-up in expansion efforts

Shannon Teoh
Malaysia Bureau Chief In Kuala Lumpur

In this second and final part of China's growing involvement in the Malaysian economy, The Straits Times looks at the major port proposals that were supposed to involve companies from China, and what is happening to them. The first part published yesterday discussed the incoming China projects and their effect on Malaysian players.

Beijing's apparent support for new Malaysian ports has sparked Kuala Lumpur's optimism that it can supplant Singapore as South-east Asia's shipping hub of choice. But the main proponents of these ports are not the huge Chinese companies being talked about.

Instead, they are actually cash- strapped Malaysian players hoping to secure a leg-up in efforts to expand quickly. And while Beijing is supportive of Malaysia's plan, The Straits Times understands that China's state-linked firms earmarked as partners have doubts about the viability of pouring billions into an already over-supplied sector.

"Port Klang is already expanding despite not running at full capacity. It makes no sense to pursue both the Melaka Gateway and Carey Island Port so close to each other in the Malacca Strait," said former Port Klang Authority (PKA) chief Lee Hwa Beng.

At least three new port projects, said to involve China and worth some RM155 billion (S$50 billion), were in the offing as of early this year.

But the massive Carey Island project beside the main Port Klang in Selangor, valued at RM100 billion and which was supposed to bring in a Chinese partner, instead acquired an Indian partner during Prime Minister Najib Razak's visit to India last month.

Industry and financial sources with knowledge of the plan told The Straits Times that MMC Corp, the Malaysian conglomerate proposing the deal ahead of plans for a public listing of its ports business, found China Merchants Group's (CMG) terms too demanding.

"MMC can't afford to finance the project on its own. But CMG doesn't just want to be a bankroller," a source said of the port on an island next to the established Port Klang.

Industry players and government officials are also doubtful that the RM43 billion Melaka Gateway, spearheaded by the little-known KAJ Developments, will take off, due to uncertainty among its Chinese partners, chief of which is PowerChina International.

The Chinese firms are still evaluating the potential returns from having to build the harbour on one natural island and three reclaimed ones. "In three years, they've invited ministers including the premier to several launches and signings, but are still short of a legally binding agreement," a government source told The Straits Times.

It is only on Malaysia's east coast town of Kuantan in Pahang that there is a Malaysian port project which has long started work with the help of a Chinese company. The Kuantan port is being expanded at a cost of RM4 billion with the involvement of China's Beibu Gulf Port Group.

For China, not only does most of its trade pass through the Malacca Strait, but also up to 80 per cent of its imports of oil and gas needed to power up its economy. This prompted then Chinese President Hu Jintao to make the "Malacca Dilemma" a key strategic issue as far back as 2003.

But Malaysia is not China's only solution to securing a trade route from Europe and the Indian Ocean. Beijing has also embarked on port-and- rail, and oil-and-gas pipe links in Myanmar, Nepal, Bangladesh and Eastern Europe. Last November, Chinese cargo was successfully carried overland to Pakistan's Gwadar Port to be shipped out.

"Yes, China is friendly to Malaysia now and wants stronger allies in Asean. But it also has other strategic interests, and we cannot assume Malaysian ports are its top priority," said former PKA boss Datuk Lee.

Analysts also believe Beijing could be cooling its long-standing policy of funding mega projects abroad.

"The Chinese government itself may now be concerned about its global image and, most importantly, about capital flight," said Dr Johan Saravanamuttu of the S. Rajaratnam School of International Studies.

Will the Bandar Malaysia U-turn have a bearing on Chinese investments?: Sin Chew Daily columnist

MAY 9, 2017

Lim Sue Goan

PETALING JAYA (SIN CHEW DAILY/ASIA NEWS NETWORK) - In the absence of accurate official explanations on the collapse of the Bandar Malaysia deal, the various speculations have since sparked tremendous market concerns.

Malaysian state-owned firm TRX City said in a statement last Wednesday (May 3) that the collapse of the deal was a result of China Railway Engineering Corporation (CREC) and Iskandar Waterfront Holdings (IWH) unable to fulfill their payment obligations. However, the joint-venture company said it had performed all its payment obligations and that TRX City's accusation was unsubstantiated.

There are currently two kinds of rumours circulating in the market, that Malaysia's ruling party Umno has steered a dramatic U-turn for the sake of election for fear of anti-Chinese sentiment among the Malays; and that Beijing is imposing capital control to restrict Chinese companies' investments overseas.

TRX City said in the statement that the Malaysian Finance Ministry would retain 100 per cent ownership to ensure Malaysians would benefit from the development, which is consistent with the ruling party's political interests.

However, as the national economy is now facing serious threats from a host of domestic as well as external factors, we need the support of funds from China more than ever.

As a matter of fact, Chinese funds have indeed relieved the debt pressure of state fund 1Malaysia Development Berhad (1MDB). Moreover, Prime Minister Najib Razak has always held in very high regard the country's ties with Beijing, and is about to visit China again later this month.

If the U-turn has been effectuated out of political considerations, it could leave a negative mark on the mutual trust already established between our two counties, which is not a very smart thing to do.

China imposed capital control measures to restrict capital outflows as a result of the yuan falling to its lowest levels against the greenback in eight years at the end of 2016. Such a policy will invariably affect the overseas acquisitions of Chinese companies, including real estate development projects.

Nevertheless, Bandar Malaysia is not just another ordinary investment. It also entails China's national interests because the project will facilitate China's bid for the Kuala Lumpur-Singapore High-Speed Rail (HSR) project. Staying away from Bandar Malaysia will risk the HSR project eventually falling into the hands of the Japanese.

As such, these two guesses are not really very logical. In its stead, a report by The Star perhaps gets closer to the fact. It was reported that the abortion of the deal was due to Malaysia finding itself unable to fulfil Beijing's "shopping list" that would include an assurance on China's HSR bid, as Malaysian officers could not commit to many of the proposed terms due to national interest and social reasons.

The report has explained the doubts we had, namely that Umno leaders are concerned that the issue of Chinese funds will dampen the party's chances of winning the election, while the Chinese authorities are applying pressure on Malaysia owing to the strategic importance of the KL-Singapore HSR project.

The government's announcement of the deal's collapse was made in a hurried manner, otherwise Mr Najib would not have cancelled his visit to Bandar Malaysia at the last minute.

The deal cancellation will nevertheless have negative impact on the country's development.

1. The 1MDB debt restructuring exercise could be at stake. An out-of-court settlement was reached between 1MDB and Abu Dhabi's International Petroleum Investment Company (IPIC) whereby 1MDB would pay IPIC US$7.01 billion (S$9.9 billion) whereas 1MDB would raise US$7.41 billion from the sale of Bandar Malaysia shares.

Uncertainties surrounding 1MDB's debts will deal a severe blow on the local currency, along with Mr Najib's political risks.

2. If the issue eats into the bilateral relationship between Malaysia and Beijing, it will affect other major Chinese investments in this country, including the East Coast Rail Line (ECRL) project.

It is absolutely necessary for the government to provide a clear explanation on this matter before it erodes other investors' confidence in the country.

Can Mr Najib once again harness his diplomatic acumen to persuade Beijing to maintain the current cordial relationship between our two countries?

3. Given the government's past records and competency, will it be able to fully unleash the economic potentials of Bandar Malaysia, or will the project be reduced to just another white elephant?

Against the backdrop of sluggish sales of KL's commercial and luxury residential units, Bandar Malaysia may not be a hen that lays the golden eggs in the absence of any value-added and innovative solution.

Bandar Malaysia is one of the mega projects that will portrait the country's vision for the future. The collapse of the deal proves that mega projects will not necessarily assure the country of its future without us putting in some real effort.

["Hardware" or infrastructure is only part of the solution, without "software" or operating system (OS), hardware are not just "white elephants", they are "dead white elephants".]

It appears that everything is within our grip, from 1MDB to Bandar Malaysia, but unfortunately these projects have lagged far behind the dramatic changes taking place in our world!

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