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FDI from China can offset drop of FDI from Europe and Japan says Gomez

FDI from China can offset drop of FDI from Europe and Japan says Gomez

By Charles F Moreira, Editor

This is the third and final part of our report on the Malaysia-China Smart Silk Road Forum Cum Business Match & Meet 2018 at the Malaysian International Trade and Exhibition Centre on 17 August 2018, where keynote speakers Dr. Edmund Terence Gomez and Mr. Lau Zheng Zhou provided participants with a preview of their Assessment Report of Chinese Investment in Malaysia, due to be published in September 2018.

To recap, Dr. Gomez, is Professor of Political Economy at the Faculty of Economics & Administration, University Malaya, whilst Lau is Senior Director and Head of the Centre for Public Policy Studies (CPPS), an independent public policy institute established by Asian Strategy and Leadership Institute (ASLI).

The report they are working on analyses China companies’ investments in Malaysia, the various industries these investments went into and their benefits or potential benefits to Malaysia’s economy, technological knowledge development and so forth.

“Whilst Mahathir was not too happy with the East Coast Rail Link (ECRL), however he must have realised that Malaysia has always thrived on foreign direct investment (FDI) and with investments from Europe and Japan slowing down, Mahathir must reconsider his attitude towards FDI from China,” said Prof. Gomez.

Prior to Malaysia’s 14th general elections, Prof. Gomez had visited every state in Malaysia and spoke about various Chinese projects in their area with several opposition (Pakatan Rakyat) politicians, who now are part of the government and they were generally favourable towards them.

They had no issues with China projects in Malacca, neither did they have issues with China investments in Johor, including with the currently controversial Forest City project which is being built on reclaimed land off Johor Baru.

Pakatan Rakyat politicians told Gomez there wasn’t an issue with the controversial ‘Great Wall of China’ in the Malaysia-China Kuantan Industrial Park and neither was it a major issue for people on the ground. Instead, poor people had set up a night market outside the wall and were earning money.

Later in a Sin Chew Daily article of 25 August 2018, the newspaper’s reporters who visited the site found no wall surrounding the industrial park itself and people could move freely into and out of the park. Instead, this controversial wall actually is a perimeter wall built around Alliance Steel (M) Sdn Bhd’s 710 acres factory site to protect its assets and there was a security guard house at its entrance like any other basic security measures implemented by factories.

Prof. Gomez is generally favourable towards China’s investments in Malaysia, provided they are beneficial to Malaysia, economically, technologically, provide employment and so forth, though he has some reservations especially about projects involving Malaysian government-linked companies (GLCs) in which there appears to be political manipulation.

“The High-Speed Rail (between Kuala Lumpur and Singapore) brings benefit but we must think a lot about the ECRL,” Prof. Gomez said in reply to Enterprise Trade Views (Enterprise TV). During his presentation, Prof. Gomez showed a list of China-Malaysia and China only companies and projects, some of which, including the ECRL were “red flagged”, whilst most were “clean” and regarded as “productive” or “highly productive”.

For some background, questions about the ECRL project arose due to allegations that its price had been inflated by RM20 billion to allow subsidiaries of the main contractor, China’s state-owned China Communications Construction Company Ltd. (CCCC) to buy some 1MDB assets to ease debt obligations of Malaysia’s controversial 1MDB sovereign debt fund.

An article in The Edge on 4 June 2018 reported Malaysia’s Prime Minister Tun Dr. Mahathir Mohamed describing the ECRL project as ‘strange’.

The Edge cited sources which said that the ECRL can be built for under RM40 billion but the contract was inflated to RM60 billion (now expected to cost as much as RM70 billion) when it was signed in 2016, and that these sources alleged that the extra RM20 billion was to be used to help 1MDB meet some of its debt obligations and for the purchase of two companies linked to Low Taek Jho, or Jho Low. The companies are Putrajaya Perdana Bhd and Loh & Loh Corp Bhd.

The Edge also said that it had sighted a document in which the RM60 billion contract sum was to be divided into three components:

1. CCCC’s cost and profits
2. The takeover of 1MDB’s assets and liabilities
3. Purchase of stakes in Loh & Loh Corp and Putrajaya Perdana”

The Edge article referred to can be read in full here:-

This was followed by an article in Malaysiakini on 14 June 2018, which said that reports (relating to ECRL and CCCC) say payment is to be made directly to CCCC without the money coming into Malaysia according to a time schedule which does not reflect payment on a percentage of completion basis. Apparently, RM20 billion has already been drawn down from the loan but there is no clarity on where the money has gone.”

On top of that, Lim (Finance Minister Lim Guan Eng) revealed a new shocker – two pipelines involving a total of RM9.4 billion to be undertaken by Suria Strategic Energy Resources (SSER), a wholly-owned subsidiary of the Finance Ministry set up specifically for the projects on May 19 2016.

“The contracts were awarded to China Petroleum Pipeline Bureau (CPPB) on Nov 1, 2016. Then Treasury secretary-general Irwan Serigar, who is also SSER chairperson, had signed the agreement awarding both projects,” said Malaysiakini.

“We have discovered that the payment schedule for the above contracts are based almost entirely on timeline milestones and not on progressive work completion milestones,” Lim (Guan Eng) said.

“On top of that consultancy fees of nearly RM1 billion were paid to two Chinese companies…”

The full Malaysiakini article can be read here:-

Then on 18 July 2018, whilst Diam Zainuddin was in China to meet Chinese government officials, The New Straits Times (NST) reported that the Malaysian Anti-Corruption Commission (MACC) had raided offices linked to three major projects, including ECRL. Here are some excerpts:-

Whilst the massive payments which are far ahead of progress in project completion raises eyebrows, The Edge’s article is mostly based upon suspicions, un-named sources and an un-named document which it sighted.

About half of the Malaysiakini article refers to The Edge’s article, except for a quotation of Finance Minister Lim Guan Eng that “we” (presumably his ministry’s or government investigators) had discovered that payment for projects had been made way in advance of project progress, which makes these payments seem “strange”.

It’s now over two months after the MACC had seized those documents related to the three projects, including the ECRL and there has so far been no further statements about discoveries of possible wrongdoing involved.

Perhaps the MACC has been preoccupied with investigating former Prime Minister Dato’ Seri Najib Tun Razak, so presumably have not had the time to investigate these China companies and may eventually come out with some statements later.

Meanwhile, all work on the ECRL is currently suspended pending Malaysian government consideration and on 24 September 2018, The Edge Financial Daily reported that the CCCC had told Malaysian media reporters in China, that if the ECRL project was revived, it was willing to enter into discussions to take an equity stake in the ECRL’s operations, like how CCCC built and now operates the Mombasa-Nairobi SGR (Standard Gauge Rail) project in Africa.

The ECRL project is owned by Malaysia Rail Link Sdn Bhd, wholly owned by Minister of Finance (Incorporated) (MoF Inc.), an investment holding company of Malaysia’s Ministry of Finance.

Defining moments

Back to the Smart Silk Road Forum, Prof. Gomez cited “two defining moments” in 2013 which would open Malaysia’s doors to investments from China.

The first was when former Prime Minister and also former Finance Minister, Dato’ Seri Najib Tun Razak’s announcement of the Bumiputera Economic Empowerment Council in September 2013.

According to The Star of 14 September 2013, at the time, Najib would head the council, amongst which its focus areas would include the enhancement enhancing bumiputera equity ownership in the corporate sector as well as asset ownership.

“The Government heard the cries for help from the bumiputeras regarding their level of participation in socio-economic development programmes,” Najib said.

One of the main measures in this strategy is the setting of targets for all chief executive officers of government-linked companies (GLCs), including for projects awarded to vendors.

Najib said this information has to be included in the CEOs’ key performance index (KPI), adding all ministries will also create a Bumiputera Development Unit, responsible for formulating proposals and implementing bumiputera agenda initiatives.

Besides the above, there were several other measures by GLCs to help bumiputera businesses.

The second “defining moment” was China’s launch of its One Belt, One Road (Belt & Road) Initiative in 2013.

Prof. Gomez believes that with Malaysia opening her doors to investments from China, it would lead to a spike in investments from China and hopefully a diversity of investments as well.

Government as an economic driver

“Both China’s and Malaysia’s economies are largely driven by state-owned enterprises (SoEs) and governments can be a big driver of economic development and a great factor which drives investment in the economy,” said Prof. Gomez.

However, Prof. Gomez questioned as to whether foreign investment partners have the technical know-how to bring to the partnership and whether they are willing to invest in research and development (R&D) activities in Malaysia, which are very expensive.

At the MSC Malaysia International Advisory Panel Meeting in Putrajaya in November 2009, then Prime Minister Dato’ Seri Najib Tun Razak spoke about the need for Malaysia to engage in R&D activities in order to become a high-income nation by 2020 as envisioned by the Economic Transformation Programme.

This writer asked Najib whether Malaysian companies or the government had the funds to invest in R&D, especially to develop our manufacturing know-how to match the know-how developed and accumulated over several decades or even a couple of centuries by established manufacturers in the advanced countries and Najib said that Malaysia alone could not afford the cost of such R&D activities and would have to rely on public-private partnerships.

In his book, In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity’’, published in 1999, Eamonn Fingleton, an Irish journalist resident in Japan pointed out that prohibitively high costs make it very hard for newer manufacturers to catch up with the manufacturing know-how acquired by established manufacturers over decades or centuries, thus providing the incumbents with a relatively unassailable advantage.

Whilst, did not say it as such when explaining the reasons for Malaysia’s drive to develop an information and communications technology and multimedia industry, however reading between the lines, officials of the Multimedia Development Corporation (now the Malaysian Digital Economy Corporation) basically admitted that it would be very hard for Malaysia to catch up with the advanced manufacturing know-how of the incumbents, so instead Malaysia decided to “leapfrog” into much newer information and communications technology and multimedia industries (“premature de-industrialisation” as Mr. Lau Zheng Zhou calls it), where barriers to getting ahead and becoming globally competitive are lower and much cheaper.

In his speech, Prof. Gomez described the dominance and roles of GLCs – Malaysia’s version of SoEs, as laid out in his book – Minister of Finance Incorporate Ownership and Control of Corporate Malaysia, by Terence Gomez with Thirshalar Padmanabhan, Norfaryanti Kamaruddin, Sunil Bhalla and Fikri Fisal and published on 15 August 2017.

Whilst Enterprise Trade Views (Enterprise TV) has not read the book, in his presentation of its details from a preview on the book in his delivery of The Sir John Monash Lecture entitled The Government’s Business: Politics, policies and the corporate sector in Malaya, Prof. Gomez described the transformation of Malaysia’s top corporate players, from being majority foreign owned in 1971, to some being government owned with most top corporations being family or private owned with most owned by politically connected persons by 1997, then after the 1997 Asian Financial Crisis, some of the top 30 were government owned with the rest mostly owned by non-bumiputra families and persons in 2001 and by 2013, many more of the top 30 were government owned, with a few foreign owned companies, domestic family owned firms, two bumiputra owned and the rest non-bumiputera owned.

By 2016, amongst the top 50 corporations in Malaysia, many were government owned through GLCs, some foreign, with the rest family or individual owned.

In his lecture, Prof. Gomez also described how Minister of Finance Incorporated has direct and indirect control, as well as minority interest in around 68,000 companies in Malaysia though seven government-linked investment companies (GLICs) – i.e. Khazanah Nasional, PNB, Employees Provident Fund (KWSP), the civil servants’ pension fund (KWAP), the pilgrim’s fund Tabung Haji, the armed forces pension fund (LTAT) and the bumiputera investment foundation YPB, all of which have investments and control in the GLCs.

Prof. Gomez maintains that these GLCs can play a positive role in Malaysia’s economy if they are professionally and competently managed, and free of political interference or vested political interests, though at the same time, he lamented that most of the top corporations are not in particularly inventive or innovative industries.

All that of course was before Malaysia’s change of government on 10 May 2018 but on 22 September 2018, Prof. Gomez told Free Malaysia Today on the sidelines of the IDEAS’ 3rd Liberation Conference, that he was disappointed that the present government had not done much to reform the old GLC structure and system.

Readers can watch Prof. Gomez’s The Sir John Monash Lecture on Monash University Malaysia’s You Tube Channel here:-





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