How far will Mahathir push China?

Malaysian leader’s government has frozen China-invested projects and raided Chinese companies in a complex and high-risk negotiation to reset relations

Asia Times

When Malaysia’s opposition alliance notched a historic upset election win on May 9, attention quickly turned to the prospects for various multibillion-dollar infrastructure projects outgoing premier Najib Razak entered into with China.

As the opposition’s prime ministerial candidate, Mahathir Mohamad vowed greater scrutiny of China-linked projects, which on the hustings he frequently criticised for their over-reliance on Chinese manpower and materials.

This month, Mahathir’s new government issued a stop-work order on major China-linked projects, stalling over US$20 billion worth of contracts in a bid to renegotiate in the name of fairness and viability.Mahathir, who maintains he wants “good relations” with China, will travel to Beijing next month in a visit that will be closely watched as Malaysia shifts away from the Najib-era transactional model of foreign policy in favour of a more non-aligned stance reflective of the nation’s emerging stature as a regional middle power.

Daim Zainuddin, the premier’s trusted trouble-shooter and head of the country’s Council of Eminent Persons advisory body, was recently dispatched to Beijing to lay the groundwork for Mahathir’s follow-up visit in August and establish a scope for the renegotiation of suspended projects.

Moments before his meeting with Foreign Minister Wang Yi, Daim was informed by his counterparts that the Malaysian Anti-Corruption Commission (MACC) had undertaken synchronized anti-corruption raids on two Chinese state-owned entities associated with the suspended projects, according to sources cited in news reports.

Daim reportedly told Beijing the raids were unfortunate and reiterated that Malaysia remained serious about maintaining strong ties with China. Chinese authorities made no official statement regarding the MACC’s move, which targeted the China Petroleum Pipeline Bureau (CPPB) and China Communications Construction Company (CCCC).

Though Mahathir’s new administration has underscored the need to prosecute alleged abuses without favour and according to the law, it is unclear why the raids were carried out during Daim’s sensitive visit to China, though the move appears to be indicative of a hardball strategy aimed at extracting major concessions from China.

Speculation by close associates of Daim told the Straits Times newspaper that rogue elements in the civil service aligned to the outgoing Najib administration may have pressed the MACC to carry out the ill-timed raids in a bid to complicate ties with China and embarrass Daim, who is reportedly resented for the outsized influence he wields as head of the CEP.

While a wider reorientation of long-standing Sino-Malaysia ties is on the cards, the status of stalled China-led infrastructure projects is likely to top the agenda when Mahathir touches down in Beijing, a city he visited several times during his first premiership.

Suspended projects include the US$20 billion East Coast Rail Link (ECRL), which was envisioned to link the South China Sea in Malaysia’s rural east with the western seaport of Klang and the strategic shipping routes along the Strait of Malacca.

Financed by a US$14 billion loan from the state-owned Export-Import Bank of China, the ECRL has proven especially controversial in Malaysia. Many have questioned its economic utility, while others balked when the Chinese state-owned CCCC was appointed as project’s contractor without an open tender.

Two suspended gas pipeline projects, the Multi-Product Pipeline (MPP) in Malacca and the Trans-Sabah Gas Pipeline (TSGP) worth a combined US$2.3 billion were also financed by the Export-Import Bank of China. The Chinese state-owned CPPB was reportedly set to become the project’s main contractor under Najib’s government.

Mahathir has consistently cautioned against unsustainable investments in large-scale infrastructure projects over fears that Malaysia could be forced into sovereignty-eroding terms if unable to service its foreign debts.

There are also suspicions that Chinese companies were involved in the multi-billion dollar 1Malaysia Development Berhad (1MDB) graft scandal, of which Najib stands personally accused of foul play. He has consistently denied any wrongdoing in a scam now under investigation in several countries, including the United States, Switzerland and Singapore.

Investigators probing 1MDB believe that Chinese purchases of stakes in a strategic power utility and real estate assets from 1MDB-related entities in 2017 were used to help settle some of the fund’s enormous debt liabilities and rescue it from potential default. The sales extended a political lifeline to Najib, who founded and oversaw 1MDB, and arguably made his administration financially dependent on China.

Accusations of 1MDB-related corruption hampered US-Malaysia ties beginning in 2015, as critical reports portrayed Najib and his associates as unrestrained kleptocrats. Economic and security ties with Beijing, already robust, were meanwhile substantially deepened after the sales. Malaysia also became one of the top investment destinations for projects linked to China’s US$1 trillion Belt and Road Initiative (BRI).

Despite being a relatively minor recipient of Chinese investment up to 2012, Malaysia became the fourth-largest recipient of China’s overseas direct investment last year. Najib’s administration, a claimant to territorial disputes in the contested South China Sea, had also appeared to soft-pedal its claims to avoid confrontation with Beijing.

Since returning to power, Mahathir has called the presence of warships the biggest threat to peace in the South China Sea’s disputed waters and recently proposed that they be kept out of the region in favor of joint small-boat patrols, a middle position not likely to endear him with either the US or China.

Malaysia’s finance ministry is currently investigating links between personalities involved in Suria Strategic Energy Resources (SSER) – a finance ministry-owned subsidiary setup in 2016 to facilitate the MPP and TSGP projects – and SRC International, a former unit of 1MDB that pursued overseas investments in energy resources.

Najib was arrested and charged earlier this month with abuse of power and criminal breach of trust in connection with the alleged embezzlement of US$10.6 million from SRC International, a small fraction of the billions of dollars allegedly siphoned from 1MDB. He denies wrongdoing and has since been released on bail pending trial in February.

Mahathir’s administration is also seeking a fugitive Malaysian businessman known as Jho Low, who is wanted in connection with alleged 1MDB corruption and money laundering. Low had recently eluded arrest in Hong Kong and Macau, both Chinese territories. Though he is believed to have left the territories, Malaysia will likely continue to press Beijing for help in his capture.

“Malaysia is not in an entirely disadvantageous position” ahead of Mahathir’s visit to Beijing, according to Shahriman Lockman, a senior analyst at the Institute of Strategic & International Studies in Malaysia. “China needs some showcase examples of Belt and Road projects, which seem to have suffered numerous hiccups around the region.”

Shahriman believes China will show a degree of flexibility and a willingness to negotiate in an attempt to keep large projects in Malaysia going, though the extent of that potential flexibility remains to be seen. Despite Mahathir’s tough rhetoric, Shahriman believes the Malaysian leader will refrain from taking a combative stance while in Beijing.

“Mahathir will use this trip to build the relationship rather than being single-minded about the projects. This is about Malaysia fixing the situation back home, not assigning blame on the Chinese,” he opines. “Mahathir knows that he will get nowhere with the Chinese if all that he brings is a list of complaints.”

Beijing has thus far avoided direct criticism of Malaysia’s ruling Pakatan Harapan coalition, though editorials in China’s nationalistic newspaper, the Global Times, have underscored Chinese firms’ right to claim compensation over changes to previously agreed projects. Malaysian officials have otherwise emphasized the durability of Sino-Malaysia ties.

Mahathir is expected to invite Chinese companies to invest in Malaysia when he visits Beijing, provided that those investments enhance Malaysia’s productive capacities, use Malaysian labor and sources, and facilitate skills and technology transfers – a stance in line with his openness toward investments from Chinese e-commerce billionaire Jack Ma.

Liew Chin Tong, a member of the Harapan-component Democratic Action Party (DAP), noted in a recent article that the current government’s “strong legitimacy and domestic credibility” enables it to craft long-term foreign policies that will enjoy longevity and widespread popular support, which will ultimately be to China’s advantage.

“It is to China’s benefit to deal with a Malaysian government that is not perceived to be anyone’s client state,” he wrote. “It is to the advantage of China that Malaysia has a strong voice in the Asean [Association of Southeast Asian Nations] community and in the eyes of the world.”