snapshots

Malaysia, China: Kuala Lumpur Gets Back on Track With the Belt and Road

4 MINS READFeb 19, 2019 | 21:08 GMT
The Big Picture

Stratfor has covered the skepticism, suspicion and resistance cropping up at different points along China's sprawling 70-country Belt and Road Initiative. One key state in this give-and-take is Malaysia, which has dragged its feet on proceeding with a massive rail link. 

What Happened

China's signature Belt and Road project in Malaysia, the East Coast Rail Link, may soon be chugging into life. Malaysian Prime Minister Mahathir Mohamad suspended the project in July 2018 after scoring a shock election win, but now — after an additional few weeks of conflicting messages from multiple bureaucracies over the project — Malaysia's foreign minister has said the two countries have entered "the last mile" in talks on the high-speed rail project. On Kuala Lumpur's side, Mahathir's key adviser, Daim Zainuddin, is leading the negotiations with an eye to reducing the scale and price tag of the rail link — something that Beijing is reportedly willing to do by as much as half of the original cost.

Why It Matters

The back and forth over the rail link has highlighted the challenges to Mahathir's administration about how to approach this strategic project, which has become a hot potato in Malaysia's relations with China. Mahathir hopes to ease dependence on China, Malaysia's largest trade partner and biggest source of investment, and reduce his country's substantial debt. At the same time, Malaysia hopes to maintain cordial relations with China and benefit in the short term as Chinese manufacturers look to diversify their supply chain amid the U.S.-China trade war.

This map shows existing or planned rail links from China to Southeast Asia.

And because China ultimately wants to keep the East Coast Rail Link on track, it is willing to compromise. After all, if Kuala Lumpur were to cancel the project at this late stage, it would hinder China's strategic aim to bypass bottlenecks and piracy in the Malacca Strait by establishing an overland link through Laos, Thailand and Malaysia. And by proceeding with the project after securing a reduction in the price, Malaysia will also save itself significant penalties, as well as $123 million in interest it would have incurred under the initial terms of the deal.

Background

After definitively canceling two energy pipeline projects, Malaysia's government is in the process of reviewing all $23 billion in Belt and Road projects in the country. The East Coast Rail Link is the world's second-biggest Belt and Road project by cost, trailing only the $21.4 billion Moscow-Kazan high-speed railway. Since Mahathir froze the project last year, Malaysia has been negotiating about the link with Beijing and state-owned China Communications Construction Co. On Jan. 26, Malaysian Economy Minister Mohamed Azmin Ali said his country would cancel the railway entirely, noting that paying $123 million in interest on the loan for the project was more onerous that spending millions on a one-time cancellation fee. Days later, however, Mahathir waded into the fray, saying Kuala Lumpur had yet to make an official decision — even as he expressed his fears that the project could "impoverish" Malaysia due to its hefty price tag. 

Malaysia is not the only country in the region that has expressed wariness about China's Belt and Road Initiative. State Counselor Aung San Suu Kyi, the de facto leader of Myanmar, has pushed for tightened scrutiny on China's projects in her country, while Indonesian opposition presidential candidate Prabowo Subianto has specifically cited Mahathir's re-examination of Chinese infrastructure plans as an example he intends to follow if elected in April. Amid growing resistance, China has been adjusting its approach on the massive initiative. Beijing suggested reducing the size of Kyaukpyu deep-sea port project in western Myanmar and offered to cooperate with Japan and other countries on Belt and Road projects in Southeast Asia and Eastern Europe. In Malaysia at least, its efforts to sweeten the pot finally appear set to provide dividends. 

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