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13 September 2018

The Future of Malaysia-China relations: Will Pakatan Harapan’s electoral victory lead to a deterioration of bilateral relations?

Following its electoral victory in May 2018, the Pakatan Harapan government has made it a priority to reassess the country’s relationship with Beijing, particularly in several major infrastructure projects funded by Chinese state-owned firms. However, this is unlikely to have a major impact on Malaysia-China relations due to strong existing economic and trade ties.

Since the new Pakatan Harapan coalition government, led by Prime Minister Mahathir Mohamad, came into power in May 2018, relations between Malaysia and China appear to be undergoing a period of readjustment. While the previous government of former Prime Minister Najib Razak was seen as very friendly towards Beijing – with several multi-billion dollar investment projects in Malaysia awarded to Chinese state-owned firms – the new Mahathir government is intends to re-evaluate these deals.

Indeed, in early July 2018, Malaysia suspended three infrastructure projects worth over USD 20 billion in which Chinese state-owned entities are involved, namely the East Coast Rail Link (ECRL) being constructed by the Chinese Communications Construction Company and two pipeline projects being built by China Petroleum Pipeline Bureau. Another major project, the Kuala Lumpur-Singapore High Speed Rail (HSR), in which a consortium of Chinese state-owned firms were frontrunners to be awarded the contract, was postponed indefinitely. Due to Malaysia’s high national debt stemming from overspending and leakages due to corruption and mismanagement of funds by the previous government, the new Mahathir-led government has made renegotiating financially unsound infrastructure deals deemed unfavourable to Putrajaya as one of its key priorities.

Given Beijing’s strong influence in Southeast Asia and the perceived “over-leveraging” by Najib on Chinese funding, the new government is keen to distance itself from China’s orbit and not be perceived as a client state. This is especially important given China’s increasing maritime expansion in the South China Sea, which Malaysia is wary of as the body of water surrounds the entire country.

Unwilling to be beholden to China, the new government is moving away from the previous government’s transactional mode of foreign policy-making, whic valued perceived economic gain ahead of strategic interests, to one based on a bilateral relationships founded on the basis of Malaysia as a “middle power” in the region: with credibility internationally and a strong claim of domestic legitimacy. A decisive electoral victory has given the Pakatan Harapan government strong legitimacy and domestic credibility, putting it in a position to formulate long-term foreign policy which enjoys longevity and widespread popular support. Reducing dependence on Chinese investment and courting other regional partners, such as Japan, is one such policy.

Despite this realignment, the dynamics of Malaysia-China relations will continue to remain stable going forward. While several high-profile deals, such as the ECRL, were cancelled, Beijing is still Putrajaya’s number one source of foreign direct investment (FDI), with over USD 3.38 billion invested in 2017. China also remains one of Malaysia’s most important trading partners. Given the vital nature of this relationship, the new government’s move to reduce its dependency on Beijing is unlikely to adversely impact economic ties between the two countries.

Strategically however, Malaysia will likely seek to check China’s growing clout in the region by leveraging its strong leadership role within ASEAN and push for the regional grouping to play a more influential role, particularly in matters relating to the South China Sea. Such a policy could put Malaysia at odds with Beijing. However, these strategic differences are unlikely to lead to worsening relations between both countries in the foreseeable future, as the fundamental dynamics of the Malaysia-China relationship, built on decades of strong trade relations and economic cooperation, will continue to be a moderating factor.

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