Nikkei Asian Review 17 November 2015

KUALA LUMPUR — Malaysia’s diplomacy skills will be tested this weekend, when leaders from the world’s two biggest economies meet here as part of a gathering of the Association of Southeast Asian Nations.

The talks come amid growing tensions in the South China Sea, and at a time when Malaysia is eager to drum up more foreign investment to help reignite its flagging economy.

Though the series of meetings on Nov. 21 and 22 are primarily for ASEAN member states, they will also be attended by representatives of the bloc’s dialogue partners, including Chinese Premier Li Keqiang and U.S. President Barack Obama. The event will be used to officially declare the formation of the ASEAN Economic Community, representing the culmination of eight years of planning to achieve greater regional economic integration.

The gathering comes on the heels of a meeting of regional defense ministers hosted by Malaysia two weeks ago. The ministers failed to produce a joint statement on maritime disputes, as they were unable to agree on the wording, according to diplomatic sources. The event did, however, provide an opportunity for U.S. Secretary of Defense Ashton Carter to speak with his Chinese counterpart, Chang Wanquan, in what was their first meeting since a U.S. naval vessel sailed near China’s artificial islands in the South China Sea in October.

Malaysia made use of its role as host to issue a toned down chairman’s statement instead, calling for an early conclusion of a legally binding code of conduct for addressing maritime disputes in waters where Brunei, China, Malaysia, the Philippines and Vietnam have overlapping claims.

Balancing act

Malaysia’s diplomatic performance in the wake of that conference appeared to some observers as revealing the country’s vulnerability as a small export-oriented economy hoping for investment from bigger trading partners.

On Nov. 5, Malaysian Defense Minister Hishamuddin Hussein met with Chang to discuss “military cooperation.” Later that day, he accepted an invitation from Carter to tour the USS Theodore Roosevelt, an aircraft carrier that was based in international waters off the coast of Sabah, in eastern Malaysia. A week later, the U.S. Embassy in Kuala Lumpur announced that Airod, a Malaysian aircraft maintenance company, had won a five-year $25 million contract to service U.S. naval KC-130J aircraft based in Yokosuka, Japan.

Though the contract is relatively small, Malaysia, with its slowing economy, was keen to get it. Its third-quarter gross domestic product growth slowed to 4.7% from the previous quarter’s 4.9% growth.

Although China’s economy is also cooling off, it is still Malaysia’s biggest trading partner, with trade growing by double digits on the year in the first nine months of this year. During his upcoming visit, Li is expected to announce a partnership between China’s Lianyungang Port and Malaysia’s Port Klang Authority under Beijing’s One Belt, One Road initiative.

“As a small country that is dependent on foreign trade, Malaysia needs the markets of China and the US both at the same time,” said Wan Saiful Wan Jan of IDEAS, a local think tank. “So we cannot afford to create a situation where we are closer to only one of them,” he added.

For Malaysia, it probably pays — at least from a business perspective — to tread cautiously in its relationships with China and the U.S.

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