The practice of economic reform for more than 30 years in China has given rise to wealthy investors and companies, ever ready for good investments overseas.
Today, China has grown to become one of the world’s major growth engines and Asia’s leading economic powerhouse with outbound investments growing to great heights.
In 2016, Ernst & Young (EY) in its fifth issue of ‘China go abroad’ report pointed out that the year was “vigorous” for Chinese enterprises in terms of overseas investments and global expansion.
China’s outward foreign direct investments (FDI) hit a record high in 2016, it said, rising 30 per cent year-on-year (y-o-y) to US$188.8 billion.
In 2016, Chinaese enterprises announced 622 overseas mergers and acquisitions (M&As), totaling US$221.7 billion, up 147 per cent y-o-y.
“Since 2016, driven by industrial transformation and upgrades, the slowdown of domestic economic growth rate, the fluctuation of the renminbi exchange rate and other factors, some Chinese enterprises have increased the allocation of assets to foreign markets.
“During 2016, Chinese enterprises announced 622 overseas M&A deals, with a total value of US$221.7 billion – an increase of 147 per cent over 2015,” the report showed.
“With more and more Chinese enterprises ‘going global’, the country has realised net capital outflow for two consecutive years.
“This not only highlights that the development of China’s open economy has reached a new stage, but also indicates the current phase of economic restructuring and upgrading.
“With increasingly fierce domestic and international competition, Chinese enterprises are seeking to optimise resource allocation.
“They are also seeking to strengthen their positions in the global value chain through investment cooperation and overseas M&As that will allow them to accumulate core technologies, brands and distribution networks,” EY added.
China is also playing a pivotal role in boosting Asia’s infrastructural growth.
According to the Asia Development Bank in its ‘Meeting Asia’s Infrastructure Needs’ report released earlier this year, developing Asia needs to invest US$26 trillion from 2016 to 2030, or US$1.7 trillion per year, of infrastructure investment in the 15 years from 2016 to 2030.
China is well aware its future is closely tied to Asia and naturally is responsive to Asia’s infrastructure needs via One Belt, One Road.
AllianceDBS Research Sdn Bhd (AllianceDBS Research) in its recently released special report on
Malaysia’s construction sector, said since 2009, China has been Asean’s largest trading partner and Asean has been China’s third largest trading partner since 2011.
“Chinese-based contractors are increasingly becoming more aggressive and dominant in the Asean infrastructure landscape.
“This is a certainly welcomed by the Asean countries given the high cost associated with executing the Asean Master Plan of Connectivity.
“Based on a study, US$50 billion or US$10 billion per annum are investments associated with Chinese companies from 2013 to 2017. This forms about 17 per cent of the regional’s infrastructure needs in 2015,” it said.
For Malaysia, the country has formed a strong partnership with China to boost its inward investments and trade between the two countries as well as to leverage on China’s rapid growth.
Statistics by Malaysian Investment Development Authority (Mida) showed that the leading sources of foreign investments in 2016 were the US, the Netherlands, China, Japan, Singapore, Republic of Korea and the UK.
These seven countries jointly accounted for 55.8 per cent of total foreign investments approved in the manufacturing, services and primary sectors.
The rise of Chinese investors can be seen by the influx of investments in various sectors, particularly the property and construction sectors. Just this year, according to a report by the Financial Times, China has taken over Singapore’s rank as the biggest investor in Malaysian real estate.
However, this rise in real estate and infrastructure investments from China also paved way to an increase in foreign competition, sending jitters across Malaysia’s construction and property markets.
AllianceDBS Research reported that based on Construction Industry Development Board’s (CIDB) statistics, in 2015 foreign contractors clinched 15.4 per cent or RM19 billion of the total construction project value.
It added, the majority of the projects that these foreign contractors participated in are on average RM250 million, with the highest value being a RM3.6 billion residential project.
In terms of value, it noted that the Chinese contractors lead the way with RM8 billion worth of projects (spread across 25 projects).
“Of late, we are seeing more participation from Chinese contractors in the Malaysian market either directly or through joint ventures with local contractors.
“In our view, we think the edge that Chinese contractors have over other foreign contractors as well as our local ones are access to funding, cheaper labour, access to materials and fast turnaround construction period,” AllianceDBS Research opined.
“More importantly, they enjoy strong support from the Chinese government via cheaper source of funding largely from mainland China lenders and the Export-Import Bank of China (China Exim Bank – China’s export credit agency).
“They are also supported by the China Export and Credit Insurance Corporation (SINOSURE) – China’s policy-oriented insurance company that provides export credit insurance,” it added.
With that, BizHive Weekly explores the advantages and drawbacks of this influx in Chinese investors in Malaysia’s market.
Big ticket China projects in Malaysia – Yay or nay?
In November last year, Malaysia’s government initiated one of its largest investment agreement with China.
A total of 14 agreements worth RM144 billion were exchanged between Malaysian and Chinese companies during Prime Minister Datuk Seri Najib Tun Razak’s official visit to China last year.
The agreements and memoranda of understanding include:
1. Engineering, Procurement, Construction and Commissioning Agreement between Malaysia Rail Link Sdn Bhd, China Communications Construction Company Limited (CCCC) and China Communications Construction Company (M) Sdn Bhd (CCCCM)
2. Memorandum of Agreement for Investment, Development and Construction of Melaka Gateway Project (KAJ Development and Power China)
3. Heads of Agreement between Bandar Malaysia Sdn Bhd and Greenland Holdings Group Overseas Investment Company Limited in respect of the Proposed Purchase of Land and Development thereon in Bandar Malaysia
4. Heads of Agreement between Selat PD Sdn Bhd and CCCC Dredging (Group) Co Ltd
5.Framework Cooperation Agreement between the State Government of Sarawak, Hebei Xinwuan Steel Group and MCC Overseas Limited on the Proposed Development of Steel Plant in Sarawak
6.Memorandum of Agreement between KAJ Development Sdn Bhd, Power China, Shenzhen Yantian Port and Rizhao Port for partnership collaboration on Melaka Gateway Port
7. Heads of Agreement for the Bandar Malaysia Financial Scheme between IWH CREC Sdn Bhd and Industrial and Commercial Bank of China (ICBC)
8. Memorandum of Understanding between East Coast Economic Region Development Council (ECERDC) and Wuxi Suntech Power Co Ltd for Production of Crystalline Silicon Solar Cells and Module within the Malaysia-China Kuantan Industrial Park
9. Memorandum of Agreement between BHS Industries Bhd and China Nuclear Huaxing Construction Co Ltd for Green Technology Park in Pekan, Pahang, Malaysia
10. China Construction Bank (Malaysia) Bhd was granted a banking licence by the Minister of Finance under the Financial Services Act 2013. With an initial paid-up capital of US$200 million, China Construction Bank will be able to provide infrastructure financing to support Malaysia’s infrastructure development
11. Memorandum of Understanding between Yanming Resources Sdn Bhd and Fuzhou Xin Zibu Culture Communication Co Ltd for the Growth and Development of Bird’s Nest Market in China
12. Memorandum of Understanding between Malaysia External Trade Development Corp (MATRADE) and Alibaba.com
13. Research and Development Collaboration Agreement between Royal Bird’s Nest, Walet Company-International Private Limited Company and Peking University on Standardisation of Edible Bird’s Nest Extract and Medical Properties for Pharmaceutical Drug Discovery
14. Memorandum of Understanding between Aladdin Group Sdn Bhd and Suzhou Lian Cheng Yihao Information Technology Co Ltd
While under China’s ‘One Belt, One Road’, according to Deloitte, Chinese outbound foreign direct investment towards countries covered by the Belt and Road Initiative in 2016 reached a stunning US$14.5 billion, of which most went to Singapore, Indonesia, India, Thailand, and Malaysia.
All these investments in Malaysian construction is growing – but what do China bring with them?
AllianceDBS Research explained, most of the time, the initiative is driven by the Chinese government via G-to-G initiatives and would tag along with government agencies when exploring the overseas markets.
“Generally, the government will appoint the contractors according to the types of projects. As an example, China Communications Construction Company Limited (CCCC) is perceived to be strong in port-related projects and China Railway Construction Corporation Limited (CRCC) and China Railway Group Limited (CREC) more in terms of rail-based projects.
“But the individual company will also do its own assessment in terms of the viability of the projects. Generally, the overseas projects generate better margins,” it said.
An encroaching, aggressive presence
For local contractors and builders, the presence of these Chinese contractors in Malaysia has sparked mixed views.
AllianceDBS Research noted, the liberalisation of the construction sector through various channels such as General Agreement on Trade in Services (GATS) and Free Trade Agreements allows foreign companies intending to operate in Malaysia to own foreign equity holding in a local construction company.
“Malaysia allows the entry of foreign contractors through representative offices, regional offices or joint venture companies incorporated in Malaysia. This is subject to foreign equity not exceeding 30 per cent.
“This means that companies with foreign equity not exceeding 30 per cent will be treated as local contractors. Contractors that are incorporated abroad are also treated as foreign contractors,” it added.
“Some believe the competition is healthy and the associated financing these contractors bring are crucial in order for the larger projects to take off.
“On the other hand, some are of the view the larger infrastructure projects should be earmarked for local players, citing the lower cost base of the Chinese players which are government-owned and are able tolerate lower margins,” AllianceDBS Research explained.
The two more recent projects awarded to Chinese parties have been in the infrastructure space and are rail-based, and these projects are the Gemas-JB double tracking (Consortium of CRCC, CREC and CCCC) and the ECRL.
Both are also part of the Asean Master Plan of Connectivity and will be integral for bridging trade in and out of Asia.
“While we acknowledge this creates more competition for local contractors, these projects are unlikely to take off without the associate funding from the Chinese and hence would still provide orderbook growth via subcontracting roles,” AllianceDBS Research opined.
It explained that this was due to Malaysia’s government debt to GDP ratio. While it has been reduced to circa 53.3 per cent in 2016 from 54.5 per cent in 2016, the official threshold limit is 55 per cent to GDP and the guidance in 2017 is for it to stabilise at around 53 per cent.
“Assuming 53 to 55 per cent government debt to GDP in 2017, the government can incur an additional RM45.6 billion to RM72.1 billion net debt this year before breaching the threshold. The guaranteed debt already is at circa 15.5 per cent to GDP in 2016 (RM191.1 billion).
“Hence, the current state of government finances does not provide it with a great amount of flexibility to finance other large-scale projects. It will have to resort to Private Financing Initiatives or foreign-based funding.
“Still, we do expect the government to be pragmatic in terms of allowing local contractors to participate via subcontracting roles.
“This will be the case for the Gemas-to-Johor Bahru double tracking, ECRL and the eventually the HSR,” it said, noting that for key projects such as MRT, there is the Swiss Challenge which would still allow the PDP to match the lowest bidder.
The research team also pointed out that the margin tolerance for China contractors is relatively lower and hence are able to bid at a more competitive rate compared to the local players.
“At the more extreme end, we also understand China-based contractors are particularly aggressive when bidding for private sector building jobs and are even willing to accept part payment for residential units or even market the development overseas.
“They also offer developers deferred payment schemes and bridging loans which were crucial in ensuring that these projects take off. This is possible given their strong balance sheets and backing by the Chinese government.
“Some developers have also highlighted besides the attractive financing schemes, the quality and speed of work is also impressive,” it explained.
However, the research team also highlighted that there have been cases of collection issues and slower-than-expected progress of work.
Furthermore, earlier last week, TRX City Sdn Bhd, a company under the Ministry of Finance (MoF), had announced the termination of the share sale agreement for Bandar Malaysia development projects with Iskandar Waterfront Holdings Sdn Bhd and CREC (IWH CREC), causing further uncertainties in the market.
However, IWH CREC on Wednesday rebuked this statement from TRX City, stating that it did not “fully and accurately reflect the circumstances and conduct of the parties in this matter.”
The firm is now reviewing the content of the termination notice and press release with its advisors and legal council.
Infrastructure development not spared from rising foreign competition
Chinese companies in the past have also played a role in various large-scale infrastructural projects in Malaysia.
The research team noted that CCCC and China Harbour Engineering, together with their local counterparts, constructed the Second Penang Bridge which was opened in March 2014.
It added, Beijing Urban Construction Group is involved in the tunnel project in Penang that is
estimated to cost US$2.6 billion.
Nevertheless, AllianceDBS Research pointed out that these Chinese contractors are also taking up local partners to aid in the completion of various projects here.
CCCC and its 49 per cent joint venture partner George Kent had also in August 2016 clinched a package for MRT Line 2 for the engineering, procurement, construction, testing and commissioning of trackworks, maintenance vehicles and works trains.
“Other joint venture with local players include Kumpulan Jetson and CCCC for a RM202 million subcontracting job for Sungai Besi-Ulu Kelang Highway and Econpile and CCCC for a RM389 million project,” it added.
Local players to benefit from rise in projects
While the rise in Chinese investors in Malaysia’s construction industry has been viewed by some as “foreboding”, the projects that these investors support can offer jobs to many local players.
The Gemas-to-Johor Bahru double tracking project, for example, could benefit local contractors such as Gamuda Bhd, while local contractors like George Kent, IJM and Vivocom, who have done work with the three Chinese parties, could also benefit.
AllianceDBS Research also pointed out that the 620km ECRL EPC contract, while it has been awarded to CCCC, as much as 30 per cent of the project value may be earmarked for local contractors.
Furthermore, it highlighted, the completion of the ECRL would bridge connectivity and trade in and out of Asia particularly for China. It would also create alternative routes to boost trade for Asean, with Malaysia as the base.
Meanwhile, in Kuantan, AllianceDBS Research believes that companies such as IJM and Muhibbah stand a chance to be major beneficiaries of the China-based developments in the state.
It noted that for Kuantan Port, for example, IJM owns 60 per cent of Kuantan Port Consortium (KPC) Sdn Bhd, while the rest is owned by Guangxi Beibu Gulf International Group (Guangxi).
“Being a strategic investor, Guangxi will be responsible for leveraging its wide network to enhance the capacity utilisation. It is also working with IJM to build an industrial park near Kuantan Port.
“Kuantan port is undergoing an expansion plan to enhance the existing New Deep Water Terminal (NDWT). This will more than double its existing capacity via two phases where works started in 2015,” it added.
In the state, Malaysia and China are also developing the Malaysia-China Kuantan Industrial Park (MCKIP), of which AllianceDBS Research explained, together with its sister park, China-Malaysia Qinzhou Industrial Park (CMQIP), the two parks have been identified by both governments as an ‘Iconic Project for Bilateral Investment Cooperation’ that will drive the development of industrial clusters in both countries.
IJM has a 40 per cent stake in Kuantan Pahang Holdings Sdn Bhd which, in turn, owns 51 per cent of the 607 hectares of MCKIP land in Gebeng.
The other shareholders of Kuantan Pahang Holdings are Sime Darby Property (30 per cent) and Pahang State Government (30 per cent). The balance is owned by Guangxi where it has committed to source more than US$20 billion worth of investments to this new growth area by 2020.
“Muhibbah announced in June 2016 it has entered into an agreement with Perbadanan Setiausaha Kerajaan Pahang for the proposed acquisition of a 99-year leasehold land measuring 500 acres in Kuantan, Pahang, for RM26.4 million.
“This translates into just RM1.21 per square feet,” it added.
A win-win partnership
All in, AllianceDBS Research opined that while Chinese contractors appear to be aggressive in Malaysian markets, it believed that the projects that China are bringing into Malaysia can also offer orderbook opportunities, and more.
It noted that the Chinese contractors are the most aggressive in private sector residential high-rise developments with their attractive financing schemes and ability to accept part payment in residential units.
“While Chinese contractors are making inroads in the infrastructure space which have largely been in government-related transportation jobs, there will be orderbook opportunities via subcontracting or JV roles for local players. These large-scale projects usually come with associated funding.
“In conclusion, we are of the view that contractors which have the highest exposure to private sector building jobs would be the more affected. This would probably be more apparent for the higher-end condominium developments and to a lesser extent the mass-market projects. Contractors which rely on building-related jobs but have internal property arms would be less impacted,” it commented.
Nevertheless, it pointed out that contractors with strong execution track record in the infrastructure space and have experience in large-scale project management roles will be beneficiaries of some of the key government infrastructure projects.
Looking ahead, the research team projected that in the longer term, domestic contractors would likely venture overseas for new orderbook opportunities.
“This could be government led where CIDB recently signed six memorandums of understanding (MoUs) with Indian industry partners today on sharing of expertise in infrastructure development in India.
“There will also likely be more consolidation among the smaller contractors given the more competitive landscape.
“A study showed that 89 per cent of the 54,345 local contractors are SMEs, while the only comparable grade contractors to the foreign contractors (Grade six and seven) comprise the remaining 11 per cent,” it added.
With stringent capital controls, China to slow outbound foreign investments
While China’s outbound investments grew to record levels last year, this year, analysts and experts believe that China will see a slowdown in its investments overseas due to the government’s recently announced measures to slow the outbound capital from the country.
Reuters reported late last year, China’s Commerce Minister Gao Hucheng was quoted as saying that the Chinese government will “promote the healthy and orderly development of outbound investment and cooperation” in 2017.
It also reported that China will sharply reduce restrictions on foreign investment access in 2017, opening up sectors where foreign companies have strong investment interest and risks are under control.
Gao was quoted as saying that that in 2017, difficulties faced in maintaining a stable flow of foreign investment into China would increase, while sources of volatility for China’s outbound investment would rise along with risks, according to an interview with state media published last year.
Beijing has announced a string of measures recently to tighten controls on money moving out of the country, including closer scrutiny of outbound investments, as the yuan skids and the country’s foreign exchange reserves fall to the lowest levels in nearly six years.
China will further enhance the competitiveness of its foreign trade and consolidate recent good momentum, Gao added.
With that, Deloitte predicts a fall in the number of sizeable deals due to the anticipated efforts by the Chinese government to combat capital flight, which will also have a negative impact on cross-industry acquisitions.
“Western Europe and North America will continue to be the largest recipients of Chinese outbound investment, but new political leadership in key economies of the the two regions would translate into adjustment of their trade relation with China.
“Despite these changes, it has become an irreversible trend for Chinese companies to continue investing in overseas markets, and the Chinese government will continue to encourage strategic foreign investment by Chinese businesses as a way to optimise its economic structure.
“In 2017, Chinese companies will remain aggressive in acquisitions, which are directly related to their core business and have the objective to gain mature technology and supply chain resources. M&A activities related to smart manufacturing, the digital economy and consumption upgrade are expected to take centre stage for China’s outbound foreign investment this year,” it explained.
Deloitte China chief economist Sitao Xu in a statement, said: “The year 2016 was marked by a series of ‘black swan’ events signalling a drastic change in the current course of globalisation. However, we see it as not so much the end, but a new chapter of globalisation.”
Meanwhile, according to JLL Global Capital Flows in a Forbes report, said that while Chinese investments would slow in 2017, China would still remain an important player in the global real estate market.
“We do believe that Chinese investors will continue to be major movers of capital into global real estate for many years to come,” David Green-Morgan, JLL Global Capital Markets Research director in Singapore was quoted as saying.
He added, “But a similar increase in 2017 may be challenging given the recent discussion about China monitoring its capital outflows.”
As for the implications these regulations might have on Chinese investments in Malaysia’s property/construction sector, AllianceDBS Research believed that Malaysia’s construction sector will be backed by consistent development spending.
It explained, “(The) government gross development expenditure spending in 2017 is expected to grow marginally to RM46 billion (3.5 per cent of GDP) from RM45 billion in 2016 (3.7 per cent of GDP).
“More importantly, the RM260 billion allocation under 11MP (compared with RM230 billion for 10MP) remains intact.”
It said it continued to believe transport-related infrastructure such as MRT, LRT, Pan Borneo, East Coast Railway Link and eventually the High Speed Rail would be of the upmost importance and would see negligible risks of delays or cuts in spending while a potential wildcard is the KL to Bangkok High Speed Rail.
“2016 saw some resurgence in public sector jobs, coming largely from transport-related projects. We expect this trend to continue in 2017 and beyond with a slew of key transport-related projects.
“Government development expenditure will still be relatively intact, more so with the recovery of oil and CPO prices.”
“During the 2007/2008 global financial crisis, development expenditure as a percentage of total budget revenue still remained high.
“2016 saw a doubling in infrastructure-related projects to RM58 billion. This trend should continue to show positive growth going forward given the government’s focus on transportation-led projects,” AllianceDBS Research commented.