PETALING JAYA: PPBM supreme council member Tariq Ismail says Malaysia’s reliance on China carries twice the risk because the world superpower is in a transition of its own.
Warning that a China in crisis will then bring all parties dependent on their economy to a collapse, he said the tendency of the government to go to China for financial investments needs a serious rethink.
“Whatever support we give to China in its reform journey cannot come at our expense.
“Malaysia, in effect brings more benefit to China in terms of achieving its reform objectives but paid for by Malaysia,” Tariq said in a statement.
He gave the example of how the workforce of the Forest City project in Johor ended up employing workers from China instead of locals.
“This type of ‘pass through’ investment while seeming to provide development assistance to Malaysia is not beneficial to the country.”
Tariq was responding to a comment by Second Finance Minister Johari Abdul Ghani last week pertaining to China-related investments.
Johari was reported to have said that because Putrajaya is dealing with state-owned firms, the risks posed by the big ticket China-related projects is minimised.
“A problem would only arise when dealing with private Chinese companies, but some private companies were okay,” Johari was quoted as saying at the Malaysian Association of Risk and Insurance Management conference on Wednesday.
Tariq said while that sounds logical but the credit risk profile of any country is unique to it and needs to be looked at separately from what is “conventional economic theory”.
“First and foremost, it is accepted that government guarantees on investments and development funding carry much weight in general. Particularly with China’s sovereign credit rating of AA- (based on Standard & Poors rating) and being of upper medium grade in general.
“However, that sovereign credit rating is derived based on dynamic economic, political and regulatory factors of the nation as a whole, in essence on China Inc,” Tariq said, adding it may seem okay in laymen terms, but China’s size and the lack of reliable data and understanding on the inner workings of China’s economy raises some concern.
He also highlighted the high debt ratio that will affect China’s economy in time to come.
“China’s current debt ratio is in excess of 200% and growing at a considerable rate. For the layman, this means for every RMB1 of GDP China produces, there is a debt of RMB2 that funded it.”
Goldman Sachs has previously announced that China’s interest payment for its debts jumped from 7.2% of GDP in 2009 to 13.0% in 2015.
“Imagine that, for every RMB100 earned, RMB13 has to go into interest payments instead of being plowed back as capital for other profitable ventures.
“Clearly, China Inc then cannot afford to continue to finance ventures abroad using debt as it had been doing these past years. Hence, the conundrum faced in the Wanda Group proposed investment into Bandar Malaysia,” Tariq said.
He said that China is also in the early stages of its five-year plan (running from 2016 to 2020) which is based on the strategies developed during the Third Plenum meet in 2013.
“In essence that strategy involves China’s economy transitioning from an investment and export-led economy to a consumption and services based economy.
“It is a complex balancing of factors which China has to manage and it ranges from manufacturing output to GDP per capita, from education levels to population demographics, and most of all on productivity per dollar of capital pumped in.”
It is this capital that is pursued by everyone, and which historically had been in the form of debts, according to Tariq.
“The outcome of not implementing these reforms by 2020, as highlighted by the IMF and other investment houses, is a looming credit crisis, leading to a potential banking crisis and impacting overall stability.”