China-Malaysia Relations: Navigating a Complex Geopolitical Sea – Part One: Deep Economic Ties

31 August 2017 Professor Vivian Louis Forbes, FDI Associate Download PDF

Key Points

  • Diplomacy and co-operation have taken the Sino-Malaysian relationship to a new high.
  • China and Malaysia are experiencing considerable annual growth in their two-way trade and China has major investments in Malaysia.
  • China is now Malaysia’s largest trading partner.
  • Malaysia has embraced the Asian Infrastructure Investment Bank and the “Belt and Road Initiative”, both of which will deepen the economic links between the two countries.

Summary

If Malaysia were a ship, captained by the Prime Minister and crewed by his Cabinet, it could be stated that the ship was on a steady course through a stormy geopolitical sea strewn with islets, reefs and rocks. History will record, perhaps, that by mid-2017, the ship of state was on course, heading towards its stated objectives of Vision 2020 with financial assistance and investments in infrastructure, either direct or indirectly, from the Government of China. In 2007, Ian Storey opined that the relationship between China and Malaysia, by mutual consent, was the best it has ever been. Indeed, the present author argued in 2013 that the promotion of economic growth overshadowed issues pertaining to sovereignty and territorial disputes between the two countries.[1]

Analysis

The governments of China and Malaysia have had a special relationship since 1974, notwithstanding the inherent sovereignty dispute over certain insular features in the southern sector of the South China Sea basin. The dispute relates to overlapping claims to territory that Malaysia perceives to be within its Exclusive Economic Zone and its natural continental shelf. As a founding member of the Association of South-East Asian Nations (ASEAN), Malaysia is aware of its standing in, and obligations to, the organisation, which adopts a unique diplomacy in resolving all disputes: the so-called “ASEAN Way”. The perceived assertiveness and simultaneous “soft diplomacy” approach taken by Beijing in the South China Sea dispute is treated with the utmost caution by Malaysia and the majority of ASEAN members. China would prefer to settle the South China Sea issue on a bilateral basis, but ASEAN is of the opinion that the sovereignty disputes should be resolved through collective negotiation between China and the regional bloc.

Malaysia boasts one of South-East Asia’s most vibrant economies through successful decades of industrial growth and relative political stability. Consisting of two regions separated by some 1,200 kilometres of the South China Sea, Malaysia is a multi-ethnic, multi-religious federation of 13 states and three federal territories. The majority Muslim ethnic Malays are dominant politically, and benefit from positive discrimination in business, education and the civil service, while a large ethnic Chinese minority holds economic power. The communities co-exist in relative harmony, although there is little racial interaction and a religious divide persists. The country is benefiting from a growth in manufacturing and is a major tourist destination, but there are fears that development could harm the environment, particularly the rainforests of northern Borneo, which are under pressure from palm oil plantations and illegal logging and mangrove destruction along the littoral as the sea is reclaimed for housing development, tourist resorts and port infrastructure. Table 1 illustrates select comparative statistics of the two countries.[2]

Table 1. Statistics

China reduced its poverty rate from 88 per cent of its population 35 years ago to a mere two per cent by 2016. The country has become the fastest-growing major economy in the world. In the last decade, China has assisted in the development plans and policies of many regional states and has helped them to grow economically with substantial aid and investments. Malaysia has been a beneficiary of that soft diplomacy approach.

From January to May 2017, China’s import and export volume reached US$1.57 trillion, an increase of about 13 per cent. Exports were valued at US$853.35 billion (an increase of 8.2 per cent) and imports equated to US$709.58 billion, an increase of 19.5 per cent. The trade surplus was US$143.77 billion, a decrease of 26.2 per cent.

Newly-approved foreign investment enterprises increased by 7.4 per cent during 2016; the actual use of foreign investment reached 666.3 billion yuan ($127.7 billion), equating to about 4.2 per cent from 2016.

Foreign aid, trade and investment, together with non-military inducements including culture and diplomacy, are considered as China’s “soft power” in the south-east Asian region and with many developing countries in the rest of Asia, Africa and Latin America. China’s trade with ASEAN countries has been growing and with Malaysia it is robust. In 2015, Malaysia’s trade with China increased by 11 per cent, or nearly 240 billion ringgit ($71.1 billion). China has been Malaysia’s largest trading partner for eight consecutive years since 2009 and Malaysian exports to China grew by 10 per cent (RM 101.53 billion, or $30.1 billion) despite slower growth in China. Exports of mining materials in particular increased by 54 per cent to RM9.6 billion ($2.8 billion) in 2015, mainly from a significant increase in exports of aluminium ores. China is Malaysia’s largest source of imports, accounting for 18.9 per cent of its total imports in 2015. Imports expanded by 12 per cent to RM129.36 billion ($38.3 billion) due to increased imports of apparel and clothing accessories, machinery, appliances and parts as well as transport equipment. Figure 1 portrays the size of China relative to its neighbours.

Fig 1. 10-Dash Line Map

Taking Relations to a New High

In 2010, Dr Mahathir, the former Prime Minister of Malaysia, observed that China retains a political system that ensures stability, combined with a modified form of a “Western market” system. He opined that Malaysia should maintain its generally good relationship with China. The rapid economic development experienced in both Malaysia and China was, in part, brought about by the mutual trade agreements for commodities, manifested under the successive leaderships of both countries and that economic co-operation has been enhanced and continues under the present leadership.

In 2011, a Memorandum of Understanding (MoU) was signed on arrangements for security, immigration and transnational crime to combat human trafficking and people smuggling.  The MoU was important for Malaysia and reflected national security concerns. There has been enhanced co-operation in agriculture, infrastructure development, foreign investment, law enforcement, military exercises, a request for special-purpose naval ships and two-way trade. There is a perceptible tilt towards China by Malaysia in terms of economic relations and the former has featured significantly in the foreign policy of the latter.

On 20 October 2016, Malaysia became a member of the Asian Infrastructure Investment Bank (AIIB). On 1 November 2016, a total of ten bilateral agreements were signed by the two governments spanning business, defence and other enterprises. A day later, the two governments agreed to co-operate on naval operations in the South China Sea to ensure peace and stability in the region. Strangely, both countries’ territorial claims in the South China Sea are relatively understated, a point that will be discussed in Part Two of in this paper. One may beg the question: what does each want from the other? As China is so dependent on open sea lines of communication for strategic and trade purposes, it obviously wishes to have closer economic and political ties with Malaysia and, hence, entice it into its sphere of influence. Malaysia, for its part, seeks Chinese financial assistance to make up for a drop in the foreign direct investment (FDI) that was earmarked for the development of port, rail and road transport infrastructure. Major housing projects on land reclaimed from the sea, in particular, in Johor, Malacca and Penang, are absorbing much of those funds.

The Government of Malaysia signed a two-year contract to buy four Littoral Mission Ships from China out of its 2017 military budget at a cost of US$3.6 billion, which represents a drop of 13 per cent from 2016. The Royal Malaysian Army and Navy are aiming for a mix and match of assets and technology – a cost-conscious policy – that includes patrol vessels, multi-role support ships and terrestrial vehicles, possibly made in China. Malaysia has since signed a contract for four ships to be constructed in China.

China is keen to undertake joint development of the hydrocarbon resources that are thought to be in the substratum of the continental shelf off north Borneo. During the first week of June 2017 discussions on the subject were held in the Malaysian and Chinese capitals but exactly how this joint venture will evolve is open to conjecture, given that the two countries have opposing views in the context of the South China Sea sovereignty dispute, even if there is a mutual appreciation of the “Belt and Road Initiative”.

Belt and Road Initiative

Announced by President Xi Jinping in October 2013, the strategic concept of “One Belt, One Road” and the “Twenty-First Century Maritime Silk Road” (now collectively known as the “Belt and Road Initiative” (BRI), will stretch from Qingdao on the Shandong Peninsula through the South China Sea and across the Indian Ocean to the eastern Mediterranean. The concept is a brilliant tactic in China’s strategic ambition to create a new economic bloc that is intended to displace the United States as the dominant regional and global power. The BRI guarantees that China will increase its economic and military engagement along the Indian Ocean maritime routes.[3]

The “belt” of the BRI is the “rebuilt” terrestrial Silk Road of yesteryear made up of super-fast trains, expressways and pipelines accompanied by new towns, factory complexes and additional infrastructure along the way. It will connect China and Europe and points in between. The maritime “road” will consist of new “super” sea-lanes between China and Europe, connecting ports in the Middle East, Africa, South Asia and South-East Asia along the way. China has built new seaports, adjunct airports, pipelines, highways, railways and more along the maritime Silk “Road.”

The initiative, according to many observers, the “Project of the Century”, is a result of China’s rapid growth since the mid-1990s and its domestic over-capacity in all manufacturing sectors, particularly steel, chemicals, general equipment, electrical machinery and automobiles, and its expertise and technology in port, rail and road network construction. The initiative has the power to shift the centre of the world’s economic activity to Asia, as well as to provide Asian countries with the resources that they need to continue developing.

China’s 2015 Military Strategy White Paper states clearly that the Peoples’ Liberation Army (Navy) [PLA (Navy)] will protect the security of strategic sea lines of communication (SLOCs) and overseas interests, and participate in international maritime co-operation so as to build itself ‘into a maritime power’. The White Paper added that the PLA (Navy) will continue to carry out anti-piracy escort missions in the Gulf of Aden and gradually intensify its participation in international peacekeeping. That the PLA (Navy) will also gradually shift to a combination of “offshore waters defence” and “open seas protection” is evident from news reports of the voyages of the newly constructed aircraft carrier in the East and South China Seas in January 2017, the fleet visit to Hong Kong on 7 July and the arrival of a force at the newly-established military base in Djibouti, in the vicinity of the Horn of Africa.

In May 2017, President Xi convened the Belt and Road Forum (BRF) to mark the grand opening of the “Belt and Road Initiative” (BRI), which would eventually encompass about 60 per cent of the world’s population and one-third of its gross domestic product (GDP). More than 110 countries and international organisations attended the BRF. Most wanted, and agreed, to become active participants. There are detractors and/or opponents – most notably, India, Japan and the US – but they are, however, presently in the minority.

The Asian Infrastructure Investment Bank

The China-initiated and backed Asian Infrastructure Investment Bank (AIIB) announced on 23 March 2017 that it had approved 13 new members, bringing the total membership to 70. The establishment of the AIIB could not be more timely and vital. Asia’s rapid growth, which has averaged 5.4 per cent annually since 2008, particularly in South-East Asia, has put huge pressure on the infrastructure of many countries, which is in critical need of expansion, upgrading or both. The region’s rapid population growth, increasing rural to urban migration and the urgent challenges of climate change, food security and, indeed, national security in all forms, have combined to make infrastructure constrictions even more acute.[4] The AIIB is led by the Government of China but is not owned by it. The Annual Report indicates the Board of Directors and their affiliations in the international community. It is an ethical organisation with zero tolerance for corruption.

That interest in joining the AIIB comes from around the world, not just Asia, affirms the rapid progress of the institution, a multilateral lender, which will compete, but also partner, with the World Bank and the regional Asian Development Bank (ADB), founded in 1966, which is based in the Philippines. The US$100 billion AIIB has notably declined to join the banks. Loans to Bangladesh, Indonesia, Pakistan and Tajikistan by the AIIB were jointly financed by the ADB and the World Bank. At the end of June 2017, the Government of Japan began to show a modicum of interest despite its initial negative reaction, due in part to political tensions over sovereignty issues in the East China Sea. The President of the ADB, Takehiko Nakao, attended the 4 May 2017 BRI conference.

Malaysia and the AIIB

In October 2016, the Parliament of Malaysia debated a Bill that would enable the government to commit to subscribe for a total of 1,095 units that would be worth US$109.5 million. The first of the five instalments would equate to US$21.9 million. The AIIB will provide advice and network links for Malaysian industries. Membership of the AIIB will promote and foster bilateral trade, services and investment between Malaysia and China and maintain and further enhance commercial and other links between Malaysia and China. There are significant Malaysian key industry sectors and professional services that will benefit from Malaysia’s endorsement of the AIIB and BRI. This is especially essential to establish a secure and efficient cross-border “e-commerce investment” and operational platform to drive and stimulate the OBOR [sic] trade and mutual prosperity.

Despite those admirable objectives and the massive future potential of the Sino-Malaysian relationship, there may yet be – to use another metaphor – storm clouds on the horizon: the two countries’ competing territorial claims in the South China Sea. The circumstances and implications of those claims will be assessed in Part Two.


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[1] Forbes, V.L., ‘China and Malaysia: Promoting Economic Growth Overshadows Sovereignty Dispute’, Beijing’s Powers and China’s Borders, B. Elleman, S. Kotkin and C. Schofield (Eds), Armonk, NY: M.E. Sharpe, 2013.

[2] Statistics were verified from the official sources of the two countries and those of international organisations. There are variations to the values stated here.

[3] See also Buszynski, L., ‘China’s Belt and Road Initiative (BRI) and Australia’; Paper presented at Belt and Road Initiative: Expanding Co-operation and Addressing Gaps Conference, Maritime Institute of Malaysia, Kuala Lumpur, 25 May 2017.

[4] AIIB, ‘Connecting Asia for the Future’ Annual Report and Accounts 2016, and Zhao Hongquan, ‘Could the AIIB Close Asian Infrastructure Finance Gap?’, paper presented at Belt and Road Initiative: Expanding Co-operation and Addressing Gaps Conference, Maritime Institute of Malaysia: Kuala Lumpur, 25 May 2017.

About the Author

Dr Forbes is an Adjunct Research Professor at the National Institute for South China Sea Studies, Haikou, China and a Distinguished Research Fellow and Guest Professor at the China Institute for Boundary and Ocean Studies, Wuhan University, Wuhan, China. He is affiliated at the professorial level with other institutions in Australia, China and Malaysia.

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

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