December 2014 31 August 2017

China-Malaysia Relations: Navigating a Complex Geopolitical Sea

Part One: Deep Economic Ties

Professor Vivian Louis Forbes FDI Associate

Summary

If Malaysia were a ship, captained by the Prime Minister and crewed by his Cabinet, it could

be stated that the ship was on a steady course through a stormy geopolitical sea strewn with

islets, reefs and rocks. History will record, perhaps, that by mid-2017, the ship of state was

on course, heading towards its stated objectives of Vision 2020 with financial assistance and

investments in infrastructure, either direct or indirectly, from the Government of China. In

2007, Ian Storey opined that the relationship between China and Malaysia, by mutual

consent, was the best it has ever been. Indeed, the present author argued in 2013 that the

Key Points

Diplomacy and co-operation have taken the Sino-Malaysian relationship

to a new high.

China and Malaysia are experiencing considerable annual growth in their

two-way trade and China has major investments in Malaysia.

China is now Malaysia’s largest trading partner.

Malaysia has embraced the Asian Infrastructure Investment Bank and the

“Belt and Road Initiative”, both of which will deepen the economic links

between the two countries.

Page 2 of 7

promotion of economic growth overshadowed issues pertaining to sovereignty and

territorial disputes between the two countries.1

Analysis

The governments of China and Malaysia have had a special relationship since 1974,

notwithstanding the inherent sovereignty dispute over certain insular features in the

southern sector of the South China Sea basin. The dispute relates to overlapping claims to

territory that Malaysia perceives to be within its Exclusive Economic Zone and its natural

continental shelf. As a founding member of the Association of South-East Asian Nations

(ASEAN), Malaysia is aware of its standing in, and obligations to, the organisation, which

adopts a unique diplomacy in resolving all disputes: the so-called “ASEAN Way”. The

perceived assertiveness and simultaneous “soft diplomacy” approach taken by Beijing in the

South China Sea dispute is treated with the utmost caution by Malaysia and the majority of

ASEAN members. China would prefer to settle the South China Sea issue on a bilateral basis,

but ASEAN is of the opinion that the sovereignty disputes should be resolved through

collective negotiation between China and the regional bloc.

Malaysia boasts one of South-East Asia's most vibrant economies through successful

decades of industrial growth and relative political stability. Consisting of two regions

separated by some 1,200 kilometres of the South China Sea, Malaysia is a multi-ethnic,

multi-religious federation of 13 states and three federal territories. The majority Muslim

ethnic Malays are dominant politically, and benefit from positive discrimination in business,

education and the civil service, while a large ethnic Chinese minority holds economic power.

The communities co-exist in relative harmony, although there is little racial interaction and a

religious divide persists. The country is benefiting from a growth in manufacturing and is a

major tourist destination, but there are fears that development could harm the

environment, particularly the rainforests of northern Borneo, which are under pressure from

palm oil plantations and illegal logging and mangrove destruction along the littoral as the

sea is reclaimed for housing development, tourist resorts and port infrastructure. Table 1

illustrates select comparative statistics of the two countries.2

China reduced its poverty rate from 88 per cent of its population 35 years ago to a mere two

per cent by 2016. The country has become the fastest-growing major economy in the world.

In the last decade, China has assisted in the development plans and policies of many regional

1 Forbes, V.L., ‘China and Malaysia: Promoting Economic Growth Overshadows Sovereignty Dispute’,

Beijing’s Powers and China’s Borders, B. Elleman, S. Kotkin and C. Schofield (Eds), Armonk, NY: M.E. Sharpe, 2013. 2 Statistics were verified from the official sources of the two countries and those of international

organisations. There are variations to the values stated here.

Page 3 of 7

states and has helped them to grow economically with substantial aid and investments.

Malaysia has been a beneficiary of that soft diplomacy approach.

From January to May 2017, China’s import and export volume reached US$1.57 trillion, an

increase of about 13 per cent. Exports were valued at US$853.35 billion (an increase of 8.2

per cent) and imports equated to US$709.58 billion, an increase of 19.5 per cent. The trade

surplus was US$143.77 billion, a decrease of 26.2 per cent.

Newly-approved foreign investment enterprises increased by 7.4 per cent during 2016; the

actual use of foreign investment reached 666.3 billion yuan ($127.7 billion), equating to

about 4.2 per cent from 2016.

Foreign aid, trade and investment, together with non-military inducements including culture

and diplomacy, are considered as China’s “soft power” in the south-east Asian region and

with many developing countries in the rest of Asia, Africa and Latin America. China’s trade

with ASEAN countries has been growing and with Malaysia it is robust. In 2015, Malaysia’s

trade with China increased by 11 per cent, or nearly 240 billion ringgit ($71.1 billion). China

has been Malaysia’s largest trading partner for eight consecutive years since 2009 and

Malaysian exports to China grew by 10 per cent (RM 101.53 billion, or $30.1 billion) despite

slower growth in China. Exports of mining materials in particular increased by 54 per cent to

RM9.6 billion ($2.8 billion) in 2015, mainly from a significant increase in exports of

Page 4 of 7

aluminium ores. China is Malaysia’s largest source of imports, accounting for 18.9 per cent

of its total imports in 2015. Imports expanded by 12 per cent to RM129.36 billion ($38.3

billion) due to increased imports of apparel and clothing accessories, machinery, appliances

and parts as well as transport equipment. Figure 1 portrays the size of China relative to its

neighbours.

Taking Relations to a New High

In 2010, Dr Mahathir, the former Prime Minister of Malaysia, observed that China retains a

political system that ensures stability, combined with a modified form of a “Western

market” system. He opined that Malaysia should maintain its generally good relationship

with China. The rapid economic development experienced in both Malaysia and China was,

in part, brought about by the mutual trade agreements for commodities, manifested under

the successive leaderships of both countries and that economic co-operation has been

enhanced and continues under the present leadership.

In 2011, a Memorandum of Understanding (MoU) was signed on arrangements for security,

immigration and transnational crime to combat human trafficking and people smuggling.

The MoU was important for Malaysia and reflected national security concerns. There has

been enhanced co-operation in agriculture, infrastructure development, foreign investment,

law enforcement, military exercises, a request for special-purpose naval ships and two-way

trade. There is a perceptible tilt towards China by Malaysia in terms of economic relations

and the former has featured significantly in the foreign policy of the latter.

On 20 October 2016, Malaysia became a member of the Asian Infrastructure Investment

Bank (AIIB). On 1 November 2016, a total of ten bilateral agreements were signed by the two

governments spanning business, defence and other enterprises. A day later, the two

governments agreed to co-operate on naval operations in the South China Sea to ensure

peace and stability in the region. Strangely, both countries’ territorial claims in the South

China Sea are relatively understated, a point that will be discussed in Part Two of in this

paper. One may beg the question: what does each want from the other? As China is so

dependent on open sea lines of communication for strategic and trade purposes, it obviously

wishes to have closer economic and political ties with Malaysia and, hence, entice it into its

sphere of influence. Malaysia, for its part, seeks Chinese financial assistance to make up for a

drop in the foreign direct investment (FDI) that was earmarked for the development of port,

rail and road transport infrastructure. Major housing projects on land reclaimed from the

sea, in particular, in Johor, Malacca and Penang, are absorbing much of those funds.

The Government of Malaysia signed a two-year contract to buy four Littoral Mission Ships

from China out of its 2017 military budget at a cost of US$3.6 billion, which represents a

drop of 13 per cent from 2016. The Royal Malaysian Army and Navy are aiming for a mix and

match of assets and technology – a cost-conscious policy – that includes patrol vessels,

multi-role support ships and terrestrial vehicles, possibly made in China. Malaysia has since

signed a contract for four ships to be constructed in China.

China is keen to undertake joint development of the hydrocarbon resources that are thought

to be in the substratum of the continental shelf off north Borneo. During the first week of

Page 5 of 7

June 2017 discussions on the subject were held in the Malaysian and Chinese capitals but

exactly how this joint venture will evolve is open to conjecture, given that the two countries

have opposing views in the context of the South China Sea sovereignty dispute, even if there

is a mutual appreciation of the “Belt and Road Initiative”.

Belt and Road Initiative

Announced by President Xi Jinping in October 2013, the strategic concept of “One Belt, One

Road” and the “Twenty-First Century Maritime Silk Road” (now collectively known as the

“Belt and Road Initiative” (BRI), will stretch from Qingdao on the Shandong Peninsula

through the South China Sea and across the Indian Ocean to the eastern Mediterranean. The

concept is a brilliant tactic in China’s strategic ambition to create a new economic bloc that

is intended to displace the United States as the dominant regional and global power. The BRI

guarantees that China will increase its economic and military engagement along the Indian

Ocean maritime routes.3

The “belt” of the BRI is the “rebuilt” terrestrial Silk Road of yesteryear made up of super-fast

trains, expressways and pipelines accompanied by new towns, factory complexes and

additional infrastructure along the way. It will connect China and Europe and points in

between. The maritime “road” will consist of new “super” sea-lanes between China and

Europe, connecting ports in the Middle East, Africa, South Asia and South-East Asia along the

way. China has built new seaports, adjunct airports, pipelines, highways, railways and more

along the maritime Silk “Road.”

The initiative, according to many observers, the “Project of the Century”, is a result of

China’s rapid growth since the mid-1990s and its domestic over-capacity in all manufacturing

sectors, particularly steel, chemicals, general equipment, electrical machinery and

automobiles, and its expertise and technology in port, rail and road network construction.

The initiative has the power to shift the centre of the world’s economic activity to Asia, as

well as to provide Asian countries with the resources that they need to continue developing.

China’s 2015 Military Strategy White Paper states clearly that the Peoples’ Liberation Army

(Navy) [PLA (Navy)] will protect the security of strategic sea lines of communication (SLOCs)

and overseas interests, and participate in international maritime co-operation so as to build

itself ‘into a maritime power’. The White Paper added that the PLA (Navy) will continue to

carry out anti-piracy escort missions in the Gulf of Aden and gradually intensify its

participation in international peacekeeping. That the PLA (Navy) will also gradually shift to a

combination of “offshore waters defence” and “open seas protection” is evident from news

reports of the voyages of the newly constructed aircraft carrier in the East and South China

Seas in January 2017, the fleet visit to Hong Kong on 7 July and the arrival of a force at the

newly-established military base in Djibouti, in the vicinity of the Horn of Africa.

In May 2017, President Xi convened the Belt and Road Forum (BRF) to mark the grand

opening of the “Belt and Road Initiative” (BRI), which would eventually encompass about 60

3 See also Buszynski, L., ‘China’s Belt and Road Initiative (BRI) and Australia’; Paper presented at Belt

and Road Initiative: Expanding Co-operation and Addressing Gaps Conference, Maritime Institute of Malaysia, Kuala Lumpur, 25 May 2017.

Page 6 of 7

per cent of the world’s population and one-third of its gross domestic product (GDP). More

than 110 countries and international organisations attended the BRF. Most wanted, and

agreed, to become active participants. There are detractors and/or opponents – most

notably, India, Japan and the US – but they are, however, presently in the minority.

The Asian Infrastructure Investment Bank

The China-initiated and backed Asian Infrastructure Investment Bank (AIIB) announced on 23

March 2017 that it had approved 13 new members, bringing the total membership to 70.

The establishment of the AIIB could not be more timely and vital. Asia’s rapid growth, which

has averaged 5.4 per cent annually since 2008, particularly in South-East Asia, has put huge

pressure on the infrastructure of many countries, which is in critical need of expansion,

upgrading or both. The region’s rapid population growth, increasing rural to urban migration

and the urgent challenges of climate change, food security and, indeed, national security in

all forms, have combined to make infrastructure constrictions even more acute.4 The AIIB is

led by the Government of China but is not owned by it. The Annual Report indicates the

Board of Directors and their affiliations in the international community. It is an ethical

organisation with zero tolerance for corruption.

That interest in joining the AIIB comes from around the world, not just Asia, affirms the rapid

progress of the institution, a multilateral lender, which will compete, but also partner, with

the World Bank and the regional Asian Development Bank (ADB), founded in 1966, which is

based in the Philippines. The US$100 billion AIIB has notably declined to join the banks.

Loans to Bangladesh, Indonesia, Pakistan and Tajikistan by the AIIB were jointly financed by

the ADB and the World Bank. At the end of June 2017, the Government of Japan began to

show a modicum of interest despite its initial negative reaction, due in part to political

tensions over sovereignty issues in the East China Sea. The President of the ADB, Takehiko

Nakao, attended the 4 May 2017 BRI conference.

Malaysia and the AIIB

In October 2016, the Parliament of Malaysia debated a Bill that would enable the

government to commit to subscribe for a total of 1,095 units that would be worth US$109.5

million. The first of the five instalments would equate to US$21.9 million. The AIIB will

provide advice and network links for Malaysian industries. Membership of the AIIB will

promote and foster bilateral trade, services and investment between Malaysia and China

and maintain and further enhance commercial and other links between Malaysia and China.

There are significant Malaysian key industry sectors and professional services that will

benefit from Malaysia’s endorsement of the AIIB and BRI. This is especially essential to

establish a secure and efficient cross-border “e-commerce investment” and operational

platform to drive and stimulate the OBOR [sic] trade and mutual prosperity.

4 AIIB, ‘Connecting Asia for the Future’ Annual Report and Accounts 2016, and Zhao Hongquan, ‘Could

the AIIB Close Asian Infrastructure Finance Gap?’, paper presented at Belt and Road Initiative: Expanding Co-operation and Addressing Gaps Conference, Maritime Institute of Malaysia: Kuala Lumpur, 25 May 2017.

Page 7 of 7

Despite those admirable objectives and the massive future potential of the Sino-Malaysian

relationship, there may yet be – to use another metaphor – storm clouds on the horizon: the

two countries competing territorial claims in the South China Sea. The circumstances and

implications of those claims will be assessed in Part Two.

*****

About the Author: Dr Forbes is an Adjunct Research Professor at the National Institute for

South China Sea Studies, Haikou, China and a Distinguished Research Fellow and Guest

Professor at the China Institute for Boundary and Ocean Studies, Wuhan University, Wuhan,

China. He is affiliated at the professorial level with other institutions in Australia, China and

Malaysia.

*****

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of

Future Directions International.

Published by Future Directions International Pty Ltd.

80 Birdwood Parade, Dalkeith WA 6009, Australia.

Tel: +61 8 9389 9831 Fax: +61 8 9389 8803

Web: www.futuredirections.org.au