May 11, 2018 / 3:07 AM / 11 days ago

Breakingviews - Malaysia can push for a healthy China rebalance

SINGAPORE (Reuters Breakingviews) - Malaysia has a chance to rebalance its relationship with China. Newly elected Mahathir Mohamad has accused his predecessor of selling out to Beijing, and vows to review investment deals. The country’s strategic position and long-standing ties with the People’s Republic give him leverage to renegotiate. But the Malaysian economy still needs Chinese support, so the haggle will stay polite.

Supporters of Mahathir Mohamad are seen outside of the National Palace, a day after general election in Kuala Lumpur, Malaysia, May 10, 2018. REUTERS/Athit Perawongmetha

Outgoing Prime Minister Najib Razak bet heavily on cozying up to China. He capitalised on connections made by his father, Premier Abdul Razak Hussein, who established diplomatic ties with Beijing in 1974. When Najib was caught in a scandal around the 1MDB development fund, Chinese officials lent a hand, purchasing power assets and real estate connected to 1MDB at generous prices.

Enlightened self-interest, perhaps, given President Xi Jinping was pushing his “Belt and Road” overseas influence initiative, and Malaysia made a perfect regional beachhead.

Either way, Beijing’s largesse has been felt in this $300 billion economy. According to DBS research, China contributed roughly 20 percent of the increase in Malaysia’s foreign direct investment between 2013 and 2017. Chinese firms are leading projects like a $14 billion rail link connecting ports on the South China Sea to shipping routes off the west coast, while investing in new shipping terminals too.

Belt and Road money has been less controversial in Malaysia than elsewhere, at least until campaigning ahead of this election. Critics complain of Chinese firms importing workers and crowding out local rivals, as well as murky contract terms. There are grounds for reviewing loan rates, preventing cost overruns, and maybe killing some projects entirely. Indonesia has trimmed its list of investment targets to avoid white elephants, but Malaysia hasn’t quite gotten around to it.

Mahathir can push back. China needs an ally in a region where it has many acquaintances but few friends. The country is already a regional hub for firms like Alibaba. Malaysia is in a key position geographically too, on the Strait of Malacca through which most of China’s oil imports are carried.

But the middle-income country needs a boost to achieve the developed economy status it covets. Chinese cash, properly guided and priced, can help, especially if technological cooperation helps upgrade local manufacturing and exports. The two sides have every reason to wrangle over the details, then agree to get along.

Breakingviews

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