Found between the South China Sea and the Indian Ocean, Malaysia occupies territory that is strategically important for the success of the Belt and Road Initiative (BRI). Enticed by the opportunity to add the vital Straits of Malacca to the
maritime routes of the BRI, China has worked with the Malaysian government on
$150 billion in projects since launching in 2013.
China has used its resources to buy stakes in Malaysian companies, construct
deep-sea ports, and finance large-scale railroad lines. Yet, China’s investments in
Malaysia have not come without scandal — it is alleged that the government of former Prime Minister Razak used Chinese investments to cover up the embezzlement of billions from Malaysia’s sovereign wealth fund “1MDB”.
This report will detail specific BRI projects financed by China in Malaysia as well as discuss the implications of those projects on the Malaysian economy, people, and government.
A Brief History of Sino-Malaysian Relations
In 1974, Malaysia became the first ASEAN member to formally recognize the People’s Republic of China. From then onwards, bilateral relations between the two countries steadily grew. By 2009, China had become Malaysia’s largest trading partner with nearly $38 billion in bilateral trade that year.
Over the last decade, however, China has expanded from trading with Malaysia to investing in the country heavily with major infrastructure projects through the BRI. In November 2016, then-Malaysian Prime Minister Najib Razak returned from China with $31 billion in Chinese investment into Malaysian infrastructure.
Despite this, a number of Malaysians began to worry about the increasing influence of China over Malaysia’s sovereignty. By 2018, this worry had culminated in a crushing defeat for PM Razak in a national election — the first time Najib’s party, Barisan Nasional (BN), had been defeated since Malaysia’s independence 61 years prior.
Razak’s successor, Mahathir Mohammad, quickly discontinued a number of BRI projects worth hundreds of millions and warned against a “new version of colonialism” – referring to BRI projects in Malaysia. Worse, PM Mahathir’s government lays out several charges against ex-PM Najib, concerning embezzlement from BRI projects and the 1MDB sovereign wealth fund. This scandal will be covered in depth in a further section of this report.
By 2019 however, after a year of financial renegotiations, relations seemed to be back on track. 2019 saw a resumption of key BRI projects, as well as an endorsement by PM Mahathir of both the BRI and Chinese corporate investment in Malaysia during a state visit to Beijing.
Key BRI Infrastructure Projects
The East Coast Rail Link (ECRL)
On October 21, 2016, then-Malaysian prime minister Najib announced plans for a railroad line that would connect the more-developed western states of Peninsular Malaysia to the relatively less-developed eastern states. The railroad was to have 23 stations, high-speed trains traveling at 200 km/h and cut travel time across Malaysia by 4-5 hours. The Malaysian government hoped that the project would “bridge a development gap between the east and west coastal regions of Malaysia”, and be “beneficial to the country and the people”.
By November 1st, 2016, the Malaysian government had signed a “framework finance deal and construction agreement” valued at $13.1 billion with the China Construction Communications Company (CCCC) as the builder of the ECRL. Crucially, the agreement requires that only 30% of the workforce on the ECRL has to come from Malaysia.
Despite owning and operating the rail link, the Malaysian government sought private funding for a large portion of the ECRL. 15% of the project funding would be covered by the Malaysian government. The rest of the funding would come as a loan from China’s EXIM Bank at a low-interest rate.
By 2018 however, the new Malaysian government had canceled the ECRL project due to financial disagreements. It took a further year of negotiations for a breakthrough to take place. In April 2019, the two governments announced that the cost of the project would be reduced by $5.4 billion with a slightly different route.
The ECRL is expected to be complete by December 2026, at which point it will be the largest railway in Southeast Asia. Additionally, the rail line is estimated to carry nearly 6 million passengers and 53 million tonnes of cargo by 2030. Finally, it is projected that the ECRL will create 80,000 Malaysian jobs, and boost economic growth by nearly 3%.
Bandar Malaysia and the 1MDB Scandal
In July 2009, then-Prime minister and finance minister Najib launched the 1Malaysia Development Berhad (1MDB), a state fund that would be used to drive new development in Malaysia.
In total, 1MDB had raised $8 billion in bonds so that it could develop various infrastructure projects in Malaysia. As debts piled up and became unmanageable, the Malaysian government began secretly repaying 1MDB’s debt in 2014. However, by January 2015, 1MDB had missed a $550 million repayment of its bonds sparking an investigation by the U.S. and Malaysian governments.
Reports began to emerge that PM Najib had received $681 million in money siphoned off from 1MDB. By May 2018, with the election of PM Mahathir, now former PM Najib was banned from leaving the country. Worse, Malaysian police raided a number of properties linked to Mr. Najib, seizing $275 million in luxury goods and another $30 million in cash.
Bandar Malaysia — a transport-oriented development hub in Kuala Lumpur valued at over $34 billion — was one of the many projects owned by 1MDB. The project was meant to become the world’s largest underground city – with an indoor theme park, shopping malls, residential buildings, a financial center, and a railway hub connecting all of Southeast Asia.
Prior to December 2015, the project was owned by the Malaysian government, specifically 1MDB. 1MDB then sold 60 percent of its shares in Bandar Malaysia to a Chinese consortium.
Unfortunately, in May 2017, the Malaysian government had to terminate the project over payment disputes with the Chinese consortium. Despite numerous attempts to revive the deal, Kuala Lumpur announced that the deal had officially fallen through in July 2021.
Currently, the Malaysian government is working on finding a number of developers from different companies to work on Bandar Malaysia together in hopes to ensure that no one country or company dominates the project again.
The Second BRI Forum
In April 2019, Prime Minister Mahathir Mohamad visited Beijing to take part in the Second Belt and Road Initiative Forum. While there, Mahathir met with Chinese President Xi Jinping and re-announced his support for the BRI.
Mahathir’s reversal on the BRI came as China agreed to buy nearly $150 million worth of palm oil from Malaysia in return for greater BRI cooperation.
Observers of the deal believed Beijing’s agreement to purchase palm oil was necessary for reviving BRI projects in Malaysia. Previously, when the Mahathir government had announced its intention to end projects like the ECRL and
Bandar Malaysia, the CCP heavily hinted at significant reductions in both Chinese palm oil purchases and Chinese tourists.
The BRI forum has led to the possibility of revival for a number of canceled projects including:
Forest City: a city-building project valued at $100 billion, located in the jungle of Johor Province near the Singapore border. The project was canceled in 2018 after criticism from PM Mahathir that the city was being built for wealthy Chinese nationals.
Various Pipeline Projects: The Multi-Product Pipeline (MPP) and the Trans-Sabah Gas Pipeline (TGSP), valued at $2.3 billion, are two pipelines originally planned to crisscross Malaysia. The pipelines are alleged to be part of the 1MDB scandal, with the Malaysian government seizing $234 million in payments from the Chinese company contracted to build the pipeline and recouping another $2 billion from China.
Malacca Gateway: Costing up to $10 billion, the Malacca Gateway was a planned deep-sea port in the Strait of Malacca initiated in 2016 by the Malaysian and Chinese governments. The project was terminated in November 2020 amid revelations that the country’s eight major ports can cover shipping demand until 2040 – rendering the Malacca gateway nearly useless. Worse, there have been persistent rumors that China had planned to use the deep-sea port for military purposes. Despite these claims, as of March 2022, the project has been reinstated and negotiations with Chinese companies are ongoing.
Kuantan Port: With a $2 billion investment into a deep-sea terminal port on Malaysia’s east coast, the Malaysian government hopes to boost Malaysia’s east coast economy and compete with Singapore over port and shipping traffic.
Implications of the Belt and Road in Malaysia:
1. Economic Outcomes
Malaysia is a top 10 BRI recipient country and its projects are the widest in scope and financial scale of any BRI projects across Southeast Asia. Trade with China has continued to rise during Malaysia’s involvement with the BRI. In fact, Sino-Malaysian trade has reached record highs year after year over the last decade.
Yet despite the more than $100 billion in Chinese investment deals, the BRI has failed to make any significant changes to Malaysia’s economy. However, this is not entirely China’s fault. As numerous expert reports explain, the primary reason the BRI has failed in Malaysia is due to widespread corruption.
Much of the money invested by China has been embezzled or squandered. Yet, the FDD makes it clear that while Malaysia’s kleptocracy was homegrown, it was facilitated in part by China through the BRI. Chinese state-owned enterprises (SOEs) invested significant capital in the 1MDB fund to keep it afloat. Worse, senior Malaysian officials claimed China even received lucrative contracts for BRI projects in exchange for helping to mitigate the 1MDB scandal.
Additionally, political changes in Malaysia have led to long-term pauses on a number of construction projects that would have already been completed otherwise.
Thus, while Chinese goods and FDI have been flowing into Malaysia, the economic impact of BRI projects is inconclusive. Thus far, only three BRI projects in Malaysia — collectively valued at just $1.56 billion — have been completed. Only time will tell if the BRI will have a positive impact on the Malaysian economy.
2. Public Response
Quantitative surveys of the Malaysian public done by the Asia Foundation reveal nuanced and mixed perceptions of the BRI projects being undertaken in Malaysia. Malaysian citizens believe that the BRI is creating positive change — specifically by creating jobs and stimulating the local Malaysian economy.
Moreover, Malaysian locals surveyed by the Asia Foundation “hope that the [BRI] will play a greater and more socially active role in assisting the needy and providing badly needed employment.”
That being said, there are a number of criticisms of the BRI. First, the same Asia Foundation study finds that BRI projects involve powerful federal and state decision-makers without actively
engaging local representatives. Many local Malays believe that their perspectives should be considered before approving Chinese investments.
Second, a number of BRI projects in Malaysia have been plagued by scandal – lacking transparency, causing environmental degradation, and consistently costing the Malaysian government far more than they are worth.
Indeed, the criticisms from local Malays have already led to a change in Chinese investment. Recent years have seen a shift from the large “mega-projects” discussed above towards smaller-scale humanitarian projects such as hospital construction.
3. Political Change
As discussed in previous sections, investment from the Peoples' Republic of China (PRC) has been a significant voting issue in past Malaysian elections. In Malaysia’s 2018 general election, the issue of China’s influence boiled over. Prime Minister Najib Razak was voted out of office, and his party Barisan Nasional (BN) lost power for the first time in 61 years.
Malaysian politics have yet to recover from this shift in power. PM Mahathir, Razak’s replacement, resigned unexpectedly after just seventeen months in power because of infighting within his party.
Successive governments have been equally short-lived, with two prime ministers resigning in under two years. Worse, the 2022 general election did little to solve Malaysia’s problems as the country elected a hung parliament, continuing its four-year political crisis.
Ultimately, China’s involvement in the 1MDB crisis as well as its increasing influence within the Malaysian economy have been important drivers of the Malaysian political crisis.
Luckily for China, Malaysia’s newest PM, Anwar Ibrahim, has described ties with China as “pivotal”, and seems likely to enhance ties with Beijing.
It is not yet clear whether PM Anwar will create a more steady political climate in Malaysia, but thus far China seems to have had significant negative effects on Malaysian politics.