Friday, May 24

Riding the dragon: Harnessing Malaysia-China’s trade partnership

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ta04483Over 30 years ago, China’s former leader Deng Xiaoping unshackled China’s economy and introduced a revolutionary idea that dramatically changed the country’s economic course and its role in the global economy.

He introduced a highly ambitious programme of economic reforms aimed at raising rates of foreign investment and growth, while being in line with China’s socialism ideology.

He further opened up China’s economy to the world by encouraging foreign trade and investment through joint ventures.

Today, China has grown to become one of the world’s major growth engines with its economy becoming the single largest contributor to the world’s gross domestic product (GDP) growth.

According to Yale University Jackson Institute of Global Affairs senior fellow Stephen S Roach in an article published on the World Economic Forum, China’s influence on the global economy has grown significantly over the years as its contribution has grown to become more vital to the world’s growth.

“If Chinese GDP growth reaches 6.7 per cent in 2016 – in line with the government’s official target and only slightly above the International Monetary Fund’s latest prediction (6.6 per cent) – China would account for 1.2 percentage points of world GDP growth. With the IMF currently expecting only 3.1 per cent global growth this year, China would contribute nearly 39 per cent of the total.

“That share dwarfs the contribution of other major economies. For example, while the United States is widely praised for a solid recovery, its GDP is expected to grow by just 2.2 per cent in 2016 – enough to contribute just 0.3 percentage points to overall world GDP growth, or only about one-fourth of the contribution made by China,” he highlighted.

Similarly, World Bank viewed since initiating market reforms in 1978, China has shifted from a centrally-planned to a market-based economy and has experienced rapid economic and social development.

It noted that China’s GDP growth has averaged nearly 10 per cent a year – the fastest sustained expansion by a major economy in history and with a population of 1.3 billion, China recently became the second largest economy and is increasingly playing an important and influential role in the global economy.

In recognition of China’s growth, earlier this year, the International Monetary Fund (IMF) made a historical move by launching of a new Special Drawing Right (SDR) valuation basket that includes the Chinese renminbi.

“The expansion of the SDR basket is an important and historic milestone for the SDR, the fund, China and the international monetary system. It is a significant change for the fund, because it is the first time since the adoption of the euro that a currency is added to the basket.

“The renminbi’s inclusion reflects the progress made in reforming China’s monetary, foreign exchange, and financial systems, and acknowledges the advances made in liberalising and improving the infrastructure of its financial markets. The continuation and deepening of these efforts, with appropriate safeguards, will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.

“This milestone also reflects the ongoing evolution of the global economy,” IMF managing director Christine Lagarde stated.

And over the last decade, China’s breakneck growth are starting to show some chinks due to a production overcapacity and a slowdown in domestic demand. Its population as well as its industrial development continues to drive trade demand worldwide, particularly in the Asian region.

Riding on China’s growth, Malaysia has also formed a strong partnership with China to boost trade between the two countries.

“China was Malaysia’s largest trading partner in 2015, a position maintained since 2009. Total bilateral trade in 2015 was US$100 billion.

“We share China’s view that the best way to face the ongoing global economic headwinds is to increase cooperation, and create mutually beneficial and sustainable growth through trade and investments,” said Prime Minister Datuk Seri Najib Tun Razak.

“With its strategic location at the heart of Southeast Asia, Malaysia holds an incomparable advantage in the construction of China’s 21st Century Maritime Silk Road initiative.

“With China’s ‘One Belt and One Road Initiative or Belt and Road Initiative (BRI)’, there has been and will be, many new opportunities for Malaysia to capitalise on,” said HSBC Bank Malaysia Bhd (HSBC Malaysia) chief executive officer Mukhtar Hussain, in a statement.

In line with that, HSBC Malaysia’s managing director Alvin Kong highlighted that business and trade transactions conducted in renminbi between Malaysia and China could increase significantly in the coming years, following the higher usage of the currency last year coupled with the rising positive factors that helped drive demand for the currency.

He noted, in Malaysia, the usage of renminbi for business settlement has risen by six per cent to 20 per cent versus 14 per cent last year.

With that, BizHive Weekly takes a look at Malaysia and China’s growing partnership.

 

Malaysia taking a bite  of China’s trade

Malaysia and China have formed a unique partnership over the last decade. Despite the recent global uncertainties, Malaysia and China have retained their steadfast bilateral partnership, with trade and investments between the two countries expected to see an increase in the next few years.

In 2013, China and Malaysia agreed to elevate bilateral ties to a ‘comprehensive strategic partnership’, with an aim to boost military cooperation and increasing their two-way trade by almost three-fold to US$160 billion by 2017.

In addition to soaring trade, Malaysia has also seen an increased flow of Chinese investments in recent years in sectors such as semiconductor, logistics, property and more.

To date, China remains one of Malaysia’s largest global trade partner, along with Singapore and US.

Based on Malaysia’s Department of Statistics reports, as of September 2016, of the total exports from China is RM67.90 billion or 11.9 per cent out of the total exports of RM568.36 billion.

While Malaysia’s total imports from China amounts to RM102.7 billion or 20.2 per cent out of Malaysia’s total imports of RM508.59 billion.

According to Malaysia’s Ministry of Finance, Bilateral trade between Malaysia and China hit RM170.6 billion in the first nine months of the year, up 1.3 per cent when compared with the same period a year ago.

Second Deputy Finance Minister Datuk Lee Chee Leong said of this figure, finished products contributed RM154.7 billion, followed by agricultural products (RM9.2 billion) and minerals (RM6 billion).

 

Global uncertainties impedes trade growth worldwide

Nevertheless, the year 2016 has not been kind to the global market including world trade as events such as UK’s exit from the European Union, uncertainties in US’ economy, volatile oil prices, and more, threaten to impede trade growth.

As an open economy and trading nation, Malaysia is also affected by the global slowdown. The slowdown of Malaysia’s trading partners have influenced their demand for Malaysian exports.

The same can be said for Malaysia and China’s trade growth as on top of macro challenges, China’s strategy to rebalance its oversupply has caused rippled affects to its trade partners, including Malaysia.

According to IMF in its Asia Pacific report released earlier this year, although China’s economy continues to make a leading contribution to global growth, the country’s size and integration into the global economy mean that its performance affects those around it.

“Spillovers from its economic rebalancing can be a concern, and recent experience suggests that spillovers to China’s neighbours in Asia might have become even larger lately, coming through not only trade but also financial linkages.

“These developments are occurring against the background of sluggish global trade, falling commodity prices, and elevated market volatility in the region since the summer of 2015,” it said.

While Malaysia and China’s trade partnership remains strong, Lee noted that in September 2016, Malaysia’s imports from China rose 9.1 per cent year-on-year (y-o-y) to reach RM102.7 billion but its exports dropped 8.5 per cent y-o-y to RM67.9 billion.

Lee attributed this to weakened exports in electrical and electronic products, as well as lower demand for commodities such as palm oil, liquefied natural gas and natural rubber, due to a slowdown in growth of the world’s second largest economy, he was quoted as saying by Bernama.

“For the same month, exports to China dropped one per cent y-o-y. This was due to the decline in exports in the manufacture of metal and petroleum products. Imports from China, however, grew three per cent y-o-y,” he added.

Meanwhile, Malaysia External Trade Development Corporation’s (Matrade) Asean Unit director, Raja Badrulnizam Raja Kamalzaman told Bernama that the January to September bilateral trade performance was the first deficit recorded between China and Malaysia for this year.

He also noted that despite China remaining Malaysia’s largest trading partner, the trade volume with Asean, as a group, was still higher in comparison, while Singapore was Malaysia’s top export destination.

Total Trade by Major Countries, Jan - Sept 2016, percentage share / SOURCE: Department of Statistics (Malaysia)

Total Trade by Major Countries, Jan – Sept 2016, percentage share
/ SOURCE: Department of Statistics (Malaysia)

SOURCE: Department of Statistics (Malaysia)

SOURCE: Department of Statistics (Malaysia)

Enhancing ties via One Belt, One Road

Under the OBOR policy, China hopes to initiate a trade routes between major economic regions including Europe, Southeast Asia and Africa.

In statement, HSBC Bank Malaysia Bhd (HSBC Malaysia) explained that the ‘One Belt’ refers to the economic belt along China’s traditional Silk Road connecting China with Europe while the ‘One Road’ is the new ‘Maritime Silk Road’ between China, Southeast Asia and Africa.

“The aim is for China to invest in the infrastructure and linkages associated with these ‘roads’ to help bolster its overseas trade. This in turn will stimulate production and consumption demand at home (China),” HSBC Malaysia sadded.

According to The Economist Intelligence Unit in its ‘One Belt, One Road: An Economic Roadmap’ report, plans for rail systems that interconnect China and the economies of mainland Southeast Asia have been envisioned for more than a century.

“The rolling stock infrastructure currently coming through the region’s project pipeline offers, if linked together, a means to China to plug directly into the economies of Myanmar, Thailand, Laos, Vietnam, Cambodia and Malaysia all the way down to Singapore,” it said.

HSBC Malaysia added, to cope with the huge funding need, Beijing launched a new supra-national financial body – the Asian Infrastructure Investment Bank (AIIB) to make ‘One Belt, One Road’ happen.

It noted that last year, AIIB has garnered support from 57 countries as prospective founding members and this is expected to create a large fund that can be sought by countries to develop infrastructure throughout Asia.

“Being a member of AIIB provides a new funding avenue for Malaysia’s infrastructure development, which in turn will promote the connectivity between China and Asean, and the region’s economic growth,” it said.

While the plan might seem far-fetched, with critiques condemning the plan as over-ambitious, agreements have already been established across the Asian region, for the development of the rail.

Earlier this month, following an official visit to China by Prime Minister Datuk Najib Tun Razak, Malaysian and Chinese companies companies had signed 14 agreements on several iconic and mega agreements worth RM144 billion.

One of these projects include the double-track East Coast Rail Line (ECRL) connecting Kuala Lumpur and urban centres in the East Coast Economic Region such as Mentakab, Kuantan, Kuala Terengganu and Tumpat, which will be a catalyst for transformation of the East Coast states of Pahang, Terengganu and Kelantan.

“The project will spur socio-economic growth in specific areas and bring great benefit to the people in the East Coast,” Najib said Friday to Malaysian journalists covering his visit to China.

The Prime Minister said it was not a mega project for prestige but designed to improve connectivity for the movement of goods and services and economic upliftment, and could be assumed to be part of China’s ‘One Belt, One Road’ initiative.

He told reporters that in Southeast Asia would become more meaningful with the implementation of the ECRL, to be undertaken with capital injection from China.

Besides improving trade and investment relations between the two countries, Najib hopes that with the project, both countries could develop more joint businesses.

 

China has so far invested US$2.5 billion (RM10.46 billion) in Malaysia while Malaysian companies have invested US$7.5 billion (RM31.38 billion) in China.

In terms of a comprehensive and strategic partnership, Najib pointed out that cooperation between the two countries was now more meaningful and comprehensive.

 

The Prime Minister had assigned his special envoy to China, Tan Sri Ong Ka Ting, to represent him in ensuring that all the projects were implemented as soon as possible.

He also emphasised the capability of China in implementing any project speedily, sayint that speed in execution gave confidence to all quarters.

Execution is important because it required the commitment of all quarters to ensure that the approved projects were implemented within the specified time, he said.

Meanwhile, TA Securities Holdings Bhd’s research arm (TA Securities) noted that China is expected provide RM55 billion in soft loans to Malaysia for the construction of ECRL, the estimated cost of this project.

“The first phase of the 600km rail line will be from the Klang Valley to Kuantan, second from Kuantan to Kuala Terengganu, and third from Kuala Terengganu to Kota Baru and Tumpat.

“In Budget 2017, it was announced that the project would connect townships such as Port Klang, Integrated Transport Terminal Gombak, Bentong, Mentakab, Kuantan, Kemaman, Kerteh, Kuala Terengganu and Kota Baru before ending in Tumpat,” it said, adding that the project is expected to take up to five years of construction, starting next year.

However, it pointed out that the five-year mark was a tall order as the entire project could actually take more than a decade to complete.

“The project would be the single largest construction project to be implemented in Malaysia to-date. However, we are reserved that the project could commence early next year as some time is required for finalisation of the detailed design, land acquisition and tender exercise. The construction period of 5 years appears to be a tall order as well.

“We opine that the construction of the first phase of the project between Klang Valley to Kuantan alone may take about five years to complete. It may require more than a decade to complete the entire 600km rail line,” it said.

Nevertheless, the research team pointed out that as the construction contract is expected to be awarded to government-owned China Construction Communications Company (CCCC), there are terms that state it has to work with local partners.

Therefore, it said, local contractors such as  GAMUDA, IJM, WCT, SUNCON, GADANG and FAJAR – which have related experience in railway construction and/ or earthwork, as potential beneficiaries of this mammoth project while piling contractors such as ECONBHD, PTARAS, IKHMAS could benefit from pilingworks for viaducts and bridges along the alignment.

 

Eyes on to China to boost FDIs

Beyond trade, Malaysia is looking to China to increase its foreign direct investments (FDI). Already, in recent years, China has boosted its investments in Malaysia particularly in the manufacturing, construction and property sectors.

According to HKTDC Research, while inward FDI to Malaysia tumbled more than 44 per cent to RM 36.1 billion (about US$9 billion) in 2015, with Malaysian Investment Development Authority (MIDA) attributing the decline to a higher base effect resulting from several high-profile FDI in 2014.

“The decline was shaper when the FDI inflows were denominated in US dollar due to the depreciating Malaysian ringgit in 2015.

“Nonetheless, MIDA noted that FDI had already exceeded the target set in the Tenth Malaysia Plan (10MP) for the period of 2011 to 2015,” the report said.

It added that the bulk of inward FDI in 2015 came from the US, Japan, Hong Kong, the Chinese mainland, Singapore, Korea and Taiwan, going mostly to the manufacturing sector.

“Regarding Hong Kong’s FDI in Malaysia, they are tied to some 400 manufacturing projects spanning E&E, basic metal, fabricated metal, garment and textile, wood and related products,” it said.

Malaysia’s Ministry of International Trade and Industry (Miti) also highlighted that China and Malaysia’s investments within both countries have also increased over the last few years.

Its Minister, Datuk Seri Mustapa Mohamed pointed out that last year, Malaysian companies invested US$7.5 billion in various sectors in China, including in tourism, retail and manufacturing, while China invested US$2.5 billion in Malaysia.

Furthermore, with China’s recently implemented ‘One Belt, One Road’ policy, Malaysia now has more opportunities to leverage on the country’s rapid growth and attract investors from China.

Prime Minister Datuk Seri Najib Tun Razak, who is also finance minister, had also pointed out that the growing economic and trade relations between Malaysia and China has been encouraged by the healthy and close political and business exchanges at the highest levels.

Bernama quoted him as saying that Malaysian companies, such as the IOI Group, Parkson, and KLK, have also considerably expanded their operations in China.

“We share China’s view that the best way to face the ongoing global economic headwinds is to increase cooperation, and create mutually beneficial and sustainable growth through trade and investments,” he added.

Najib said as China increasingly engaged with friends and neighbours, through the Go Abroad strategy, the ‘One Belt, One Road’ initiative and multilateral agreements such as the Asean-China Free Trade Agreement, Malaysia has also benefited from China’s prominence on the world stage.

He said the Malaysian economy remains stable and on a positive trajectory, with the Gross Domestic Product growth projected to be four to 4.5 percent this year, and up to five percent in 2017.

“With our strong economic fundamentals, Malaysia continues to be a very attractive destination for foreign direct investments (FDI),” he said at the recently held Round Table Meeting with 30 Chinese Captains of Industry.

Najib was quoted as saying that in the first half of 2016, approved FDI has already reached 83.3 per cent of the total approved for the whole of last year.

He added with Malaysia’s highly diversified economy, strong manufacturing foundation, developed infrastructure and connectivity, proactive government policies alongside a sound legal system, there is enormous potential for further cooperation with China.

“Malaysia can also be China’s gateway for Asean and beyond,” he told the meeting.

 

Sarawak looks at China as investment partner

In East Malaysia, Sarawak is also not missing out on the vast opportunities China has to offer in its country as well as for the state.

According to Second Minister of Resource Planning and Environment Datuk Amar Awang Tengah Ali Hasan, China has become an emerging source of foreign direct investment (FDI) for Sarawak, recently.

During the signing ceremony of the Declaration of Friendship Agreement between Fujian Province of China and Sarawak last month, he said to date, China remains as one of the state’s most important trading partners.

Awang Tengah, who is also Minister of Industrial and Entrepreneur Development, Trade and Investment, also pointed out that last year, Sarawak’s export to China totalled RM7.4 billion and imports totalled RM4.5 billion.

Over the last three years, Sarawak has welcomed infrastructure investments from Chinese Xi’an LONGi Silicon Materials Corporation and Comtec Solar Group, which brought in more than RM2 billion as investment in the solar panel industry.

In addition, it is also noted that companies like Sinohydro and Yantze Three Gorges Technology and Economy Development Co Ltd, China Machinery Engineering Corporation had been involved in the construction of the state’s hydropower dams and coal-fired power plant.

China has also identified several areas in Sarawak which the country is interested in. These sectors include agricultural, infrastructure, and education.

During his visit to Sarawak earlier this year, Chinese ambassador to Malaysia Dr Huang HuiKang noted that on the infrastructure aspect, as Sarawak was in the process of industrialisation and urbanisation, the state would need a lot of investments for infrastructure such as highways, airports, ports and so on.

“Chinese companies wish to actively participate in such cooperation as they have strong and rich experiences in this area as well as the technology and management.”

He added that China would look into encouraging more Chinese investments in capacity building through the country’s ‘One Belt, One Road’ initiative.

More on China’s investments that are currently operational in Sarawak, Xi’an LONGi Silicon Materials Corp (LONGi) from China has so far invested over RM1 billion in setting up an integrated solar plant in Sama Jaya Free Industrial Zone here, creating 2,360 jobs for Sarawakians.

Its board chairman Zhong Baoshen said LONGi through its subsidiary LONGi (Kuching) Sdn Bhd had invested RM1.066 billion in the integrated solar plant which comprises a 1GW silicon ingot and 2GW wafer plant, a 500MW PERC cells plant and a 500MW high performance module plant.

The integrated solar plant, he said, would be completed and begin operations by the end of this year and, LONGi had lined up more future investments for the plant here.

Meanwhile, China-based Comtec Solar Group (Comtec) via its subsidiary Comtec Solar International (M) Sdn Bhd had also invested on a RM1.2 billion solar wafer manufacturing plant in the Sama Jaya Free Industrial Zone here.

Having acquired approximately 40 acres of land in Sama Jaya Free Industrial Zone, this makes the Sama Jaya plant one of the biggest mono solar wafer manufacturing facilities in the world upon completion.

During the ground breaking ceremony of the plant, its chairman John Zhang affirmed Comtec’s pride to have the opportunity to further bolster its Malaysian plant to be one of the world’s biggest mono solar wafer manufacturing under the help of Sarawak’s government.

“Our particular global industry is very demanding and I am also certain that Comtec’s investment will also promote a new chain of supply and service partners which altogether will benefit the state and country,” he added.

China’s interest in Sarawak has grown as seen with the presence of these two companies as well as the establishment of various direct flights to and from Sarawak and China.

As SCORE grows, Sarawak’s government hopes that more Chinese companies would see Sarawak as a promising place to invest in.

“China has the proven track records, capacity and expertise to develop industries and infrastructures that we are promoting at SCORE (Sarawak Corridor of Renewable Energy).

“For instance, China companies were involved in our power sector development, such as the construction of hydro electric power dams in Bakun and Murum and the coal fired plant in Mukah.

“We believe given the vast opportunities in Sarawak, China can play even more active role in the development of our state economy,” said Dato Sri Wong Soon Koh, Sarawak Second Minister of Finance.