By Wan Saiful Wan Jan, for Sin Chew Daily, 25 March 2017
It is unfortunate that the debate on China’s investments into Malaysia has become overly politicised lately. China’s interest in Malaysia, and this region generally, is complex, and it deserves a more analytical treatment than the banality afforded to it by some politicians and commentators.
An environment that invites genuine foreign investments is a good thing. Opening our markets for investors and entrepreneurs will bring prosperity to the population. This is proven time after time by many researches.
One good study is the annual Economic Freedom of the World Report. The report is produced by the Economic Freedom Network, led by a team at Canada’s Fraser Institute and supported by think tanks from almost 100 countries. Last year the study examined 159 countries. Just like in previous years the study found that higher level of economic freedom correlates positively with many important indicators such as income per capita, economic growth, poverty reduction, and civil and political freedom. In other words, higher economic freedom comes hand in hand with other types of freedom and progress that many of us aspire to.
In that sense, it is great to see the arrival of China’s investments and we should be happy with the growing economic relationship. Economic relationship with China is not new. Being part of ASEAN, Malaysia has enjoyed growing relationship with China for quite some time. The relationship became stronger when the ASEAN-China Free Trade Agreement (ACFTA) came into force on 1 January 2010. China has also taken further steps to enhance the relationship by establishing the China-ASEAN Investment Cooperation Fund in 2013. And, China’s three policy banks – China Development Bank, the China Eximbank and the Agricultural Development Bank of China – whose role is to support the Chinese government’s policy objectives, have also been actively funding China’s investment into the ASEAN region.
As a result, Chinese investment into ASEAN has significantly increased. In the early days of the ACFTA it was already the largest free trade area in the world with a combined population of 1.94 billion and combined GDP of more than USD 9 trillion. Today the relationship is much stronger and the flow of money from China is on the increase. Interestingly the relationship has evolved from straightforward trading to more investments, with the arrival of Chinese companies to build massive infrastructure in ASEAN countries, including Malaysia.
China seems happy to make those investments, as it fits nicely into their diplomatic interests. Their attitude has been consistent, including when they established the Asian Infrastructure Investment Bank (AIIB) and announced their One Belt One Road (OBOR) agenda. Both emphasise connectivity, and good connectivity requires good infrastructure in all the target countries.
The Chinese “investment” model however has attracted scrutiny, especially on whether it is actually just a long term loan. In many recently announced Malaysian projects, China provides financing to China’s companies, some of which are state-owned enterprises, to build infrastructure but Malaysia is required to pay back the money. Ultimately, over the long term, there is still an outflow of fund from Malaysia to China.
The concern is compounded by another additional question: is there a real trickle-down effect from the projects to local SMEs? Previously when Tier 1 contracts were awarded to Western companies, they subcontract to many local companies, thereby creating a trickle-down effect, benefitting and spurring the growth of local companies and encouraging technology transfer. But now there are anecdotal complaints from Malaysian companies that Chinese companies procure almost everything from China, resulting in the displacement of local companies.
This concerns does have a historical basis. A review published by the African Labour Research Network in 2009 found that Chinese investors hardly create any linkages to the local economy because they source directly from China. And Chinese construction projects in Africa are usually carried out by Chinese state owned enterprises who often utilise large numbers of Chinese manpower and materials. Unsurprisingly, the report states that “thousands of jobs were lost in countries like Zambia, Ghana, South Africa, Nigeria, Ethiopia and Sudan.”
This raises a question for local companies. With SMEs contributing 36.3 percent to our national GDP and 97 percent of Malaysian businesses being SMEs, this is a question that cannot be ignored. Are they getting a fair chance to bid for a slice of the pie from Chinese investments, or is the door closed for them?
There is also an issue that has been highlighted among researchers for decades but frequently ignored by Malaysian commentators. A study by John Ravenhill from the Australian National University, published as far back as 1995, argued that China’s moves are driven more by political rather than economic interests. Building on this point, a study in 2011 by Evelyn Goh of the Royal Holloway University of London, explains how China practices “authoritarian capitalism” and this is being similarly pursued by some other countries in this region. It is important to note this factor because the rise of China’s economic authority here implies the increasing risk of enjoying economic growth with less or no political and social liberalisation.
As I said at the beginning, increased economic freedom usually brings other types of freedoms too. But China provides a model on how to avoid that. Encouraging further entry of the Chinese model may excite certain groups because it provides lessons on how to create economic growth while at the same time strengthen one party rule and deny political freedom to the population.
Clearly the situation is more complex than what is presented by many observers, and deserves more careful analysis. It is unbecoming of any serious commentator to simplify this into political mudslinging.