Malaysia Rethinks $20B "Belt and Road" Project

[By Ben Bland]

Breaking up is hard to do, judging by the Malaysian government’s latest contortions over how to handle a $20 billion Chinese-backed rail project of questionable economic value.

The East Coast Rail Link (ECRL) is one of several high-profile Chinese infrastructure deals signed by previous prime minister Najib Razak, who is separately being prosecuted for corruption and money laundering for his role in the 1MDB graft scandal. (He denies any wrongdoing.)

Pushing back too hard against Xi’s signature initiative could backfire.

New (and former) Prime Minister Mahathir Mohamad promised to scrap or renegotiate these “unequal treaties”, as he called them in a phrase designed to stick in Beijing’s craw. But that is easier said than done given the divisions in his loose governing coalition and the potential costs of saying no to an emerging superpower.

Last week, Economic Affairs Minister Azmin Ali said that the government had cancelled the ECRL, which is meant to connect the country’s less-developed east coast to southern Thailand and the capital, Kuala Lumpur, because the costs of paying interest on the Chinese loans were unsustainable.

But Finance Minister Lim Guan Eng insisted that no final decision had been taken and that negotiations with Beijing were continuing behind closed doors.

Construction, which is still in the early stages, is being led by the state-owned China Communications Construction Company and is 85% funded by the Export-Import Bank of China, one of Beijing’s main policy lenders.

The ECRL is one of the most high-profile projects connected to the Belt and Road Initiative, Chinese President Xi Jinping’s plan to deepen trade links with Asia and Europe through massive infrastructure investments. That puts the Malaysian government in a tricky position as it seeks to extricate itself from a deal that most analysts believe is not economically viable.

Pushing back too hard against Xi’s signature initiative could backfire, given that China is Malaysia’s biggest trade partner, has the ability to pressure Malaysian interests in the South China Sea, and has not been shy in the past about using boycott diplomacy.

The opposition Malaysian Chinese Association, which was part of the Najib government that agreed to the ECRL deal, warned (self-servingly) this week that “a nightmare looms” if Mahathir cancels the project and Beijing retaliates.

But the Chinese government, and the state-owned entities directly involved, will also undermine the prospects for the Belt and Road if they are seen to be forcing a small developing country to proceed with a plan that makes little financial sense and was agreed with a former leader now on trial for corruption.

Domestically, the ECRL impasse also highlights the political discord bubbling just below the surface of Mahathir’s Pakatan Harapan (or Alliance of Hope) coalition and the festering internecine disputes at the heart of Malaysian politics.

93-year-old Mahathir promised after last May’s election victory that he would hand power within two years to Anwar Ibrahim, his former protégé turned foe turned ally of sorts.

But Anwar, who has twice been jailed on politically motivated sodomy charges (during the reigns of Mahathir and Najib), remains fearful that Mahathir might go back on his word and stay on longer or seek to promote alternative leaders.

Enter Azmin, a former long-time aide to Anwar with his own ambitions for the highest office and relative youth on his side (he’s 54 years old, while Anwar is 71). Azmin has clashed with Anwar over appointments in their Parti Keadilan Rakyat (People’s Justice Party) following hard-fought internal elections last year. And his apparently premature comments on the cancellation of the ECRL underline his desire to push himself to the top of the political agenda.

Mahathir, wily and playful as ever, has said he will stand by his promise to hand over power to Anwar, while also casting some doubt on his intentions, telling the Straits Times in November that “as a democratic nation, we have to listen to the people”.

With political divisions and economic pressures at home, and much uncertainty over how to resolve the disputed projects with China, it will not be easy for Mahathir and his government to keep the “New Malaysia” on the rails.

The ECRL disagreement is also a big test for Beijing, which will have to show more flexibility and pragmatism if it is overcome the problems that inevitably arise when promoting large infrastructure projects in developing democracies such as Malaysia.

Ben Bland is the director of the Southeast Asia project at the Lowy Institute. He sets the institute’s research agenda for this important region, commissioning analysis papers and organising programs of events and visiting fellows. Ben’s personal research interests span politics, economics and diplomacy across Southeast Asia, with a particular focus on Indonesia, Malaysia and Vietnam, as well as China’s growing role in the region. Before joining the Lowy Institute, Ben was an award-winning foreign correspondent for the Financial Times, with postings in Hanoi, Hong Kong and Jakarta and experience reporting across China and Southeast Asia over the previous decade.

This article appears courtesy of the Lowy Interpreter, and it may be found in its original form here.