The China factor in Malaysia’s growth

(From left)Lim: 'It is now more cost effective to produce outside of China.'; Wong: 'Malaysia's bond holdings have gone back to over 50%.'; Azman: 'Mida is optimistic China will continue to invest in Malaysia for many years to come.'

THEY always say to look out for that elephant in the room, if we need to understand the dynamics of a situation or resolve a problem. The elephant is big but most people never notice it, because they always choose to focus on issues that are beyond their control.

This exact situation is now playing out in Malaysia.

Investors have their head wrapped around issues such as the negative interest rate environment, low oil prices, the slowdown in the developed world and the overall volatility in markets over the last two years.

In a time when fear and uncertainty still cloud the market, many do not realise a giant elephant lumbering in Malaysia’s humid grounds. This elephant could potentially give Malaysia a significant advantage not just for survival, but growth during tough times.

That elephant is China.

China is pouring huge money into Malaysia and most people have yet to bat an eye on the significance of this huge impact.

In times of trouble, who is it that comes to support Malaysia? It is the Chinese.

The support China has given to Malaysia via the purchase of 1MDB assets speaks volumes.

The first was the purchase of 1MDB’s energy assets in Edra Global Energy Bhd for RM9.83bil by state-owned China General Nuclear Power Corp last year.

Then in December, China Railway Construction Corp Ltd (CRCC) – one of the world’s largest construction companies – teamed up with Iskandar Waterfront Holdings Sdn Bhd to buy a 60% stake in 1MDB’s Bandar Malaysia for RM7.41bil.

A mixed property project, Bandar Malaysia is located on 196.7ha and will host terminals for the Kuala Lumpur-Singapore High Speed Rail (HSR) project.

China is also seen as the forerunner in the race for the highly anticipated RM70bil HSR project planned for launch within one to two years.

China Railway Engineering Corp (CREC), which is keen to bid for the HSR project, announced it will invest US$2bil (RM8.09bil) to build its regional centre in Bandar Malaysia.

Then in April, it was reported that China’s government has started buying more Malaysian government securities (MGS) and this inflow of new money could possibly rise to 50 billion yuan (RM30bil) in total or 8.5% of Malaysia’s total outstanding MGS in early April.

On Nov 23, Chinese Premier Li Keqiang announced that China would buy more MGS, issue yuan bonds in Kuala Lumpur and grant local institutional funds a quota of 50 billion yuan under the Renminbi Qualified Foreign Institutional Investor programme to invest directly in Chinese equities in the mainland.

“This has led to Malaysia’s foreign bond holdings going back up to over 50% and also gave our ringgit some form of stability,” says Astramina Advisory Sdn Bhd managing director Wong Muh Rong.

Foreign ownership of Malaysian government and corporate bonds rose to a 22-month high of RM240.9bil in July from RM235.2bil in June.

In particular, foreign ownership of Malaysian Government Securities (MGS) increased RM5.8bil in July to RM209.7bil. Foreigners now own 51.9% of the total outstanding MGS.

China is being opportunistic when they made major investments in Malaysia, especially for Bandar Malaysia and the EDRA Energy investments,” says Sino RH Capital (M) Sdn Bhd CEO and managing partner Scott Lim.

“It is not that Malaysia is looking more attractive. It is that China is looking at the world. This is the beginning of a new era for China in its rise as a superpower. While China has 1.4 billion people, Asean has 600 million people. Together, we will have at least 2 billion people, and that is a big portion of the world population, almost 30%. China realises that, and that is why its focus is here,” says Lim.

He added that China’s economy is clearly slowing after some 30 years of 8%-10% growth.

“Growth in the next few decades will be lower. There is a limit to how much China can export, and how much fixed assets they can invest in. The reality is that their economy has reached some sort of maturity. If you were to look at their labour cost, China’s cost is now higher than other Asean countries. China is no longer competitive in terms of wages. It is now more cost effective to produce outside of China,” says Lim.

Chinese money flooding Malaysia

“There are many China-based corporations that are looking for assets in Malaysia and other Asean countries. Not just property or land assets. They are here to invest in manufacturing, infrastructure, tourism and hospitality as well as the finance sector,” says former investment banker Ian Yoong Kah Yin.

He says a few Chinese firms are planning to invest US$200mil (RM800mil) to US$300mil (RM1.2bil) a year in Asean countries.

A China-based multi-billion dollar corporation has approached Yoong for investment advice in the Asean region.

“The Chinese are not only keen to invest in Malaysia but also in other Asean countries such as Indonesia and Thailand. Malaysia is highly regarded by Chinese corporations as the ringgit is undervalued and the country well governed,” he says.

Malaysia is politically aligned with China in the “One Belt One Road” initiative, he adds.

“A huge wave of Chinese investors are expected to come in this part of the world in the next five years,” he says.

According to Yoong the labour cost in urban areas of China has become more expensive than in many Asean countries including Malaysia.

“The Chinese are testing the water on investing in the manufacturing sector in Malaysia because of the excellent infrastructure, lower costs and the wide use of Mandarin,” Yoong says.

“The general consensus in Shanghai and Beijing is that Malaysians are honourable people and they are keen on building long-term relationships – good guanxi,” he adds.

According to the Malaysian Investment Development Authority (Mida), for the first three months of this year, China is the largest foreign investor in Malaysia’s manufacturing sector.

During that period, Mida had approved a total of nine manufacturing projects from China with investments worth RM1.5bil.

“The value of approved investments from China in the manufacturing sector has increased by more than 50%, from RM1.2bil in 2011 to RM1.9bil in 2015,” Mida chief executive officer Datuk Azman Mahmud tells StarBizWeek.

The majority of China’s investments in the manufacturing sector are mainly in basic metal, electronics and electrical, textiles and textile products and chemical and chemical products.

Azman reckons that Malaysia’s diversified economy, strong manufacturing foundation, developed infrastructure and connectivity, proactive government policies and good legal system are among the reasons China investors have come to invest in the country.

“It is also important to note that multiculturalism has not only made Malaysia a distinctive nation, it has also made Malaysia the only country to offer cost competitive multi-ethnic and multilingual workforce that can effectively communicate with most of the markets in the region.

Azman says that Malaysia’s policy direction and strategies such as the 11th Malaysia Plan is in line with the China government’s Outbound Investment Strategy, which focuses on building up infrastructure, construction, logistics, transportation and energy, and other new development of emerging market.

“Malaysia has signed an agreement to cooperate in production capacity and investment with China in November last year. Both governments will act as facilitators for identified projects,” he says.

“China has indicated mutual sentiments of Malaysia being a profitable investment location to serve the growing Asian markets through close investment cooperation such as the Malaysia-China 5 Year Cooperation Programme (2012-2017), Asean-China Free Trade Agreement and Renminbi Qualified Foreign Institutional Investor Programme.

“Building upon this momentum, Mida is optimistic that China will continue to invest in Malaysia for many years to come,” Azman says.

One Belt One Road

The Chinese government is putting in massive efforts into its going-global strategy under its ‘One Belt One Road’ regional economic expansion initiative.

According to a PwC report, about US$250bil (RM1 trillion) in projects have been built, recently started or have been agreed on and signed in relation to the belt and road initiative.

PwC predicts that the three-year-old belt and road initiative will mobilise up to US$1 trillion (RM4 trillion) of state financing from the Chinese government in the next 10 years.

The belt-road initiative was first announced in 2013 by Chinese President Xi Jinping. It aims at reviving the ancient silk trade route and maritime trade route, and increase connectivity between Asian, European and African continents.

Together, the belt and road covers 65 countries populated by 4.4 billion people.

Lim says China’s “One Belt One Road” initiative is a sign that China knows it is going into the maturity phase of growth. To extend their economic cycle, they have to do that sort of mapping to ensure they stay longer in the game.

“The maritime and rail connection of One Belt One Road will lead to Asean growing. That’s the way China is going to grow from now on. They can participate in the regional trade by supporting those infrastructure needs,” he says.

Meanwhile, Iskandar Malaysia has reportedly recorded a cumulative investment of RM203bil in the past 10 years, of which China contributed RM22.2bil.

China contributes close to 15% to committed investments, mainly in the property development sector such as the multi-billion mega development Forest City in Gelang Patah.

China investors still find the property, manufacturing and tourism sectors attractive.

China and its commitment to Malaysia

China has been Malaysia’s biggest trading partner.

Last week, MCA president Datuk Seri Liow Tiong Lai gave his party a tall order when he announced that MCA aimed to help the country achieve the bilateral trade target of US$160bil (RM640bil) with China by 2019.

Malaysia-China trade rose to US$120bil in 2014 from about US$100bil in 2013, although it fell to just below US$100bil in 2015 due to weak global economic slowdown.

Furthermore, the relationship between Malaysia and China isn’t merely diplomatic. Malaysia has a strong ally in the Chinese embassy here. Dr Huang Huikang, the high-profile ambassador, appears just as keen to push for initiatives that are mutually beneficial for the two countries.

Huang has announced plans for new investments from China amounting to more than RM20bil.

Huang also discloses that the total Malaysia-China joint investment in Bandar Malaysia could rise to RM150bil, when the integrated high-speed train terminal cum property project is completed.

Malaysia’s advantage

Lim says that while China is a dominating force, Malaysia can work with this force to prosper.

“When China investors come here, they bring capital and technology. They can create the paradigm shift, and we can participate in that,” says Lim.

“Malaysia is a multicultural society. We have a solid advantage in terms of languages. We are able to do business with most in the region because we can speak English, Mandarin and others. Compared to the Thais and Indonesians, communicating with the Malaysians are easier for the Chinese,” says Lim.

“If we can work well with China, then they can use us as a gateway. If our government is willing to welcome them, not just their investments, but also as a tourist and for them to make Malaysia their second home, we definitely can achieve a lot more. In short, we should encourage them to work, live and play in Malaysia,” he says.

Wong adds that there are a lot of successful Malaysian businessmen from Malaysia in China, so that is already a good start to the relationship between China and Malaysia. This alone has led to the Chinese coming to do business in Malaysia

“The Chinese feel at home here in Malaysia. They enjoy our hospitality and many of them apply to make Malaysia their second home,” says Wong.

Wong added that the Chinese have done a lot for the Malaysian economy.

“For example for the Forest City development by Country Garden, they have been bringing in buses and buses of people to come in and buy their developments.

Thee multi-billion ringgit purchase of a substantial equity stake in Bandar Malaysia by China Railway Construction Corporation is extremely significant. In the past, China Communications Construction Co was also involved in the construction of Penang’s second bridge. Meanwhile, the Xiamen university is fully funded by China government and Xiamen university. The Chinese are already very active here in terms of infrastructure works,” says Wong.

Sunsuria’s flagship project, the freehold 525-acre Sunsuria City located in Salak Tinggi has a gross development value of RM10bil with the 150-acre Xiamen University Malaysia campus being the core of the township.

The cost of the entire campus is estimated at RM1.3bil. It is the university’s first campus abroad and will have a 61ha footprint. It will be able to have a student intake of 10,000.

“When the Chinese come in to Malaysia, they don’t just bring in technical skills and capital, they also fund the projects,” she says.

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