Mainstream
Addressing poor perceptions of Chinese investments
Lee Heng Guie 
As of the end of last year, China was the sixth-largest exporter of capital in terms of outward direct investment (ODI) stocks (US$1.3 tril or 4.8% of the world’s ODI stocks) – Bloomberg
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China is now a dominant driver of global capital flows. It is not only the world’s third-largest recipient of foreign direct investment (FDI), absorbing 7.7% of the world’s FDI flows, but also the second-largest exporter of capital, contributing 12.6% of the world’s outward investment last year.

With its future dominance on the world stage further reaffirmed after the 19th Congress of the Chinese Communist Party, China will continue to champion economic and market openness and hence, spur the export of capital to the rest of the world.

As of the end of last year, China was the sixth-largest exporter of capital in terms of outward direct investment (ODI) stocks (US$1.3 tril or 4.8% of the world’s ODI stocks). 

In recent years, China’s increasing outward investments to Asia, Africa and Latin America was made possible with its unprecedented opening policy and “going out” strategy to spur deeper economic and financial integration with the world economy. The pace of investment accelerated and reached greater heights following the Belt and Road Initiative (BRI) launched in 2013.

In 2015 and last year, China’s outward investments surpassed US$100 bil, scaling a record high of US$183.1 bil last year or 12.6% of the world’s ODI (US$127.6 bil in 2015).

China’s ODI grew by an average of 14.2%, from US$107.3 bil in 2013 to US$183.1 bil last year. Notably, BRI has been instrumental in driving the growth of China’s ODI flows and stocks, growing by 19.3% and 24.7% per annum, respectively since 2013.

China’s economic engagements have substantially contributed to the favourable perceptions of the country amid lingering concerns about its dominant influence in these regions via trade and investment channels and public infrastructure financing. 

Malaysia, like other countries in the region, is also seen as a favourable destination for Chinese investors. As China continues to expand its global economic and financial outreach, it is critical for Malaysia to strengthen the bilateral economic and business partnership to achieve a sustainable and inclusive growth between the two nations. 

 

Broader and deeper

China’s investment flows into Malaysia had risen steadily from RM920 mil or 0.9% of Malaysia’s FDI flows in 2010 to RM6.2 bil or 9.0% in H1 this year, taking its share of Malaysia’s FDI stocks to 2.6% at end-June from a mere 0.3% in 2010. The outstanding FDI stocks stood at RM14.5 bil at end-June (RM1.1 bil at end-2010). 

China’s investment in Malaysia has broadened, spanning a wide variety of sectors, including public transportation, port, manufacturing (steel, solar power, textile, electronics and electrical products), industrial park, real estate, construction and energy.

The notable projects are Kuantan Industrial Park, East Coast Rail Link, Melaka Gateway, and the recent acquisition of a 49.9% stake in the national car manufacturer by Geely Holdings Group. China also indicated strong interest to participate in the Kuala Lumpur-Singapore High-Speed Rail and Bandar Malaysia projects.

 

Not without concerns

Like any FDI, Chinese investment is welcome to support our economic and industrial development, capacity expansion as well as capital formation in the form of direct investment, acquisitions, joint ventures and loans. 

However, China’s rising economic engagement with Malaysia has not been without concerns, negative perceptions and criticisms. For instance, there are concerns about investments with relatively low local content in terms of raw materials, employment opportunities for locals and the impact on domestic small and medium enterprises (SMEs).

Some view Chinese companies as unfair competitors in terms of product pricing, and they see many informal barriers to entry into the China market. 

The perceived low economic linkages with local economy do not come as a surprise as China’s BRI is seen as a platform for exporting its surplus capacity to countries participating in the programme.

Most major BRI projects were undertaken by Chinese builders though some were sub-contracted to local players. Projects initiated by the Malaysian government and GLCs can invite the participation of domestic SMEs with proven track record.  

Some have raised concerns about the economic risks associated with over-reliance on China as a marked slowdown in its economy may threaten the implementation of BRI projects and also China’s private investments in Malaysia.

That said, Malaysia’s sources of FDI are well diversified although China’s presence has increased in recent years. At end-June, Singapore came in tops with a share of 21.2% of Malaysia’s FDI stocks, followed by Japan (12.4%), Hong Kong (8.1%), the Netherlands (7.9%), the United States (6.5%), Switzerland (4.0%), and the United Kingdom (4.0%). China is in 10th spot with a share of 2.6%.

The threat perceptions on Malaysia’s sovereign risk stem from China’s substantial interests in some connectivity projects as well as its assertiveness on territorial issues surrounding the South China Sea. BRI is seen as a tool to strengthen China’s geo-political influence regionally and globally.  

These negative perceptions and concerns seem hard to correct and address. Perhaps the lack of transparency and positive information about China’s investments are the main factor for the doubt about the country’s sincerity to strike a win-win deal with Malaysia.

The Malaysian government, private sector and SMEs must coordinate their approach to collaborate and partner with Chinese investors and businesses to secure mutual benefits between the two countries.

 

Promote halal products

These can be achieved through the strict enforcement of a local procurement policy, encouraging more purchases of Malaysia’s commodities, seeking new products in China’s market such as halal and green products, promoting eco-tourism in Malaysia, and building business intelligence and market information network.

SMEs must also be well prepared in terms of product quality and competitive pricing via strategic business partnership with China; and harness the opportunities in e-commerce as facilitated by Alibaba’s platform though it also presents a competitive threat to Malaysian SMEs.

SMEs must be ready to embrace digitalisation and sharpen technological capacity to scale up and tap into the global marketplace. For Beijing, it needs to build trust and relationship, commit to long-term investment, and create jobs and domestic economic linkages.  

Lee Heng Guie is executive director of Socio-Economic Research Centre, an independent research organisation



This article first appeared in Focus Malaysia Issue 256.