The Strategist

Malaysia refuses participation in Chinese The Belt and Road Initiative

08/22/2018 - 16:42

The first major crack in five years appeared in the Chinese "The Belt and Road Initiative". The Prime Minister of Malaysia, Mahathir bin Mohamad, announced yesterday during a visit to Beijing that the Chinese projects in his country will be frozen. His predecessor, Najib Razak, signed agreements related to these projects with China. According to the country’s government, Chinese loans have placed an unbearable burden on the state budget, and the deal need to be reviewed.

Eric Teoh via flickr
Eric Teoh via flickr
"Not the Chinese, but the Malaysian government, is to blame," Mahathir Mohamad said at the final press conference before departing from China. "They borrowed huge sums of money, and now we have problems with paying back what they borrowed. This cannot be called direct foreign investment." 92-year-old former leader of Malaysia, Mr. Mohamad, returned to power after a 15-year break in May on the wave of public discontent with Prime Minister Najib Razak. His career was destroyed by the corruption case in Malaysia's largest development fund, 1MDB. Back in 2015, the fund accumulated $ 11 billion of debt; at that, about $ 4.5 billion were withdrawn in an unknown direction.

One of his first decrees of Mahathir Mohamad was to freeze three Chinese projects on construction of a high-speed railway and two gas pipelines in the country. Initially, the railway cost Kuala Lumpur $ 13.6 billion, but afterwards the price rose to $ 16.5 billion thanks to various additional agreements. Moreover, the price rises to $ 20 billion given all the interest that the country will have to pay to the Chinese Exim Bank (the bank covered 85% of the project’s financing). All this became known only after the government changed. The new authorities also revealed that that during the reign of Najib Razak, the country's total debt rose to 1 trillion ringgit ($ 252 billion) with a country's GDP of $ 364 billion.

The frozen East Coast Railway was the flagship project of the Chinese Belt and Road initiative and was to become part of a transcontinental route connecting China and Singapore through the territory of Southeast Asia. By the time the project was stopped, it had already consumed about $ 5 billion. The cost of the loan for the country was 3.25% per annum, the payout period was 20 years. Construction began in 2017.

Having the projects stopped, Mahathir Mohamad immediately stated that "he is not an anti-Chinese leader" and intends to go to Beijing to review the transactions’ terms. During his recent five-day visit, he met with Chairman of the People's Republic of China Xi Jinping, Prime Minister Li Keqiang and a number of other officials. However, his final statement implies that conditions for the loans have not been reviewed yet. According to Mr. Mohamad, this requires "more time".

He, however, made it clear that he was ready to wait as long as necessary. "These projects will not be implemented," the Prime Minister of Malaysia said. "If we need to pay a penalty, we will pay it." But our task now is to reduce the debt." He complained that the previous government "played with money, did not make a normal assessment of effectiveness of investments, nor a feasibility study." Mr. Mohamad assured the press that the Chinese partners "were sympathetic to the situation". He also criticized his predecessor Najib Razak. "It was not smart to subscribe to these projects," the Malay prime minister said. "We will get this money from Najib."

The situation is aggravated by the fact that Najib Razak supposedly used loans from Chinese banks not to build a railway and two pipes, but to plug holes in the balance of 1MDB. In July, three criminal cases against the former Prime Minister were opened on corruption and embezzlement of public funds.

The public freeze of Chinese projects became the largest incident of this kind that happened with the Chinese initiative during the last five years. Previously, all the problems that arose between Beijing and third countries were solved behind the scenes - as a rule, in favor of the PRC. In particular, the Sri Lankan leadership, not wishing to pay the debts of the previous government to China, was forced to transfer the port of Hambantota and the adjacent territory at the end of 2017 under the management of a Chinese company. In November 2017, the government of Nepal canceled construction of the Budha Hydropower Plant by the Chinese company, a contract signed by the Maoist government, which lost power in June 2017.