KUALA LUMPUR: China is investing heavily in Malaysia, and the government continues to woo Chinese firms.
According to Citi Research these large investments have significant implications for the growth of the economy and the ringgit.
There is a suggestion that the impact may not be as good as appears on paper.
It said: “Overall, foreign direct investment from China may understate the extent of Chinese involvement in the Malaysian economy, but overstate the impact on GDP growth or ringgit demand.”
The Edge quoted it as saying that the announced railway and port projects with Chinese interest could make up between 24% and 32% of Malaysia’s 2016 nominal gross domestic product, spread out over the next 10 to 20 years.
Chinese FDI inflows remained on course to meet or exceed the 2016 figure of RM18.7 billion, The Edge quoted Citi Research as saying.
It said, however, that these large investments raised many questions.
“First, there are concerns that these projects are motivated more by geopolitical than commercial considerations, especially given concerns of existing overcapacity in Malaysian ports.
“In particular, Chinese interest in the ports along the west coast of the peninsula stems from China’s desire to secure access to the Straits of Malacca. The East Coast Rail Line (ECRL) and the recently proposed trans-peninsular oil pipeline would serve as the land bridge between these ports facing the South China Sea.”
It said the mode of Chinese involvement was not completely clear.
“Major government-led projects would be funded primarily by loans from Chinese state-owned banks rather than greenfield FDI, which could lead to a further rise in contingent liabilities for the Malaysian government.”
Chinese involvement, it said, could also come via construction contracts to Chinese state-owned enterprises.
Citi Research said there were also questions over the spillover to Malaysia’s GDP, “given concerns that the materials, companies and even labour involved in the projects will be Chinese”.
It added: “Data from the American Enterprise Institute’s China Global Investment Tracker shows US$14.6 billion worth of investments between 2013 and 2016, but less than half of these — US$6.6 billion — were greenfield investments, with the rest mainly merger and acquisition transactions, which merely represent a transfer of ownership, rather than the addition to GDP growth, but will still be represented as FDI inflows (and support ringgit demand).
“Even with greenfield FDI, the impact on growth will depend on the extent of leakages due to imports of capital goods and labour.”
It noted that at US$12.6 billion, construction contracts awarded to Chinese firms during the same period were almost twice as large as greenfield investments, and comparable in size with the total investments in the same period.
“All else equal, such contracts represent service imports. The gross impact of such contracts is to subtract from headline GDP growth and ringgit demand.”
Net impact on ringgit demand, it said, would depend on the funding mechanism.