Malaysia Keeps Its Options Open

7 MINS READNov 14, 2016 | 09:30 GMT
Malaysia Keeps Its Options Open
Malaysian Prime Minister Najib Razak's (R) recent visit to Beijing exemplifies Malaysia's strategy, which has been shaped to accommodate China's growing clout and uncertainty over the direction of U.S. policy in the Western Pacific.
(WANG ZHAO/AFP/Getty Images)

Malaysian Prime Minister Najib Razak pledged to take his country's relationship with China to new heights during a visit to Beijing two weeks ago. The trip won him plenty of Chinese largesse — Najib signed an estimated $34 billion in investment and infrastructure deals while in China. He also agreed to buy at least four Chinese-made naval vessels, his country's first major arms purchase from China, and, according to a Chinese diplomat, to address competing claims in the South China Sea through bilateral dialogue, Beijing's preferred method of dispute resolution. While in China, the Malaysian prime minister took the opportunity to excoriate the United States over its perceived meddling in his country's internal affairs. As a result, the trip drew the attention of Western security partners concerned about Beijing's efforts to pull Southeast Asian states into its orbit. 

As with some of its neighbors, internal political issues are accelerating Malaysia's embrace of Beijing, but bigger issues are also at play. Ultimately, the visit should be viewed as Malaysia adapting its long-standing regional strategy to accommodate China's growing clout amid deepening uncertainty over the direction of U.S. policy in the Western Pacific. This reflects an emerging paradigm regarding Southeast Asia and China, though it doesn’t yet portend a substantial tilt away from the West.

Several reports suggest that Najib is embracing Beijing so enthusiastically in part to signal his displeasure with a U.S. Department of Justice investigation into 1MDB, a Malaysian state investment fund. Najib is accused of pilfering nearly $1 billion from 1MDB, a scandal that has damaged the prime minister's image and that of his ruling Barisan Nasional coalition ahead of the next general elections, expected sometime next year. The probe, announced in July, added credibility to the charges against Najib and his associates, harming Malaysia's reputation among foreign investors and spooking the country's business community. (Similar investigations are underway in other finance hubs such as Singapore, London and Switzerland.)

At first glance, Najib's trip to China may seem to mark yet another example of the United States nudging a nominal ally, following Thailand and, more dramatically, the Philippines, closer to Beijing with pressure over human rights, democracy or corruption issues. Each of these cases indeed highlights the power of domestic concerns to alter the regional geopolitical landscape, at least temporarily, and China's ability to exploit the political needs of Southeast Asia's ruling parties for its own ends. But like its neighbors, Malaysia has neither the intent nor the capability to fully turn away from the United States.

Malaysia's Strategy

Malaysia covers a wide and eminently awkward geographical space that puts it astride regional economic flows, but also makes it vulnerable to internal ethnic and socio-economic fractures. Since winning its independence from the United Kingdom in 1957, the country's overwhelmingly inward focus has shaped its foreign policy. It pursues relations with outside powers where doing so augments its development as a business and technology hub and regional energy provider — or where it helps address its internal security imperatives. But it often avoids asserting itself in contentious regional issues, in part to avoid giving outside powers cause to exploit its internal divides or threaten the delicate political stability that has underpinned its economic rise.

As a result, it generally seeks to keep major outside powers at arm’s length. Longtime Malaysian leader Mahathir Mohamad (who is currently leading a movement to oust Najib) routinely denounced Washington's role in Asia — while still quietly cultivating economic and security ties with the United States. The country has taken a similar approach to Beijing since 1974, when Najib's father, former Prime Minister Abdul Razak Hussein, made Malaysia the first Southeast Asian country to normalize ties with the People's Republic of China.

The country has its reservations about China — from unease over Beijing's assertiveness in the South China Sea to irritation over Chinese fishing boats in its exclusive economic zone to anxiety over China's comparative military prowess. Even so, the warming relations between the two countries comes as little surprise. Over the past few years, Kuala Lumpur has taken a more balanced stance in the maritime dispute than have other claimant states in the South China Sea. For example, the U.S. military launches surveillance flights from Malaysian territory and often conducts joint exercises with the country's armed forces. Malaysia is also strengthening its defense ties with Japan and other nearby claimant states, much as the Philippines is. But unlike Manila, Kuala Lumpur has refrained from seeking legal recourse over China's claims to the waters off its coast and granting the U.S. military extensive access to its bases. Instead, Malaysia has proved itself willing to downplay the maritime dispute and its problems with encroaching Chinese fishermen to improve its bargaining position with Beijing in other areas.

A Beneficial Arrangement

This approach has allowed the country to reap economic benefits denied to more vocal South China Sea claimants such Vietnam and, until recently, the Philippines. For the past seven years, China has been Malaysia's largest trading partner, and its investment in the country's manufacturing industry has surged. Chinese investment is also fueling a rapid infrastructure build-out in Malaysia — an economic imperative for the geographically fractured country. The 1MDB saga, meanwhile, has likely worsened the country's sputtering economy, making the need for Chinese funds more acute. (Chinese firms helped ease the pressure on Najib by buying some $2.3 billion in distressed energy and real estate assets held by the deeply indebted state investment fund, becoming Malaysia's largest foreign investor in the process.) Given the role that patronage plays in Malaysian politics, the coming elections have added urgency to Najib and his coalition's quest to plug the country's financial gaps.

Malaysia has reason to look to China for cetain defense needs, as well. The Malaysian military relies heavily on Western equipment, and interoperability issues alone would limit its ability to expand beyond its traditional suppliers. But to enable its security forces to patrol the country's vast maritime domain on a tight budget (its 2017 budget includes a 12 percent cut in defense spending), Malaysia, like its fellow South China Sea claimants, will have to explore more affordable options, such as Chinese arms and equipment. The relatively low-cost Chinese littoral mission vessles purchased during Najib's visit to Beijing — a deal reportedly in the works long before Washington launched its 1MDB probe — are a good place to start. The South China Sea dispute notwithstanding, Malaysia's more immediate security imperatives stem from its inability to keep Islamist militants, pirates and other non-state actors from the largely ungoverned waters of the Sulu and Celebes seas. The newly acquired Chinese naval vessels, which can carry helicopters, are ideal for the kinds of maritime surveillance and coastal operations that Malaysia will have to conduct to address these threats.

Finding a Balance

Increasingly, the Malaysian strategy reflects a paradigm settling in across the region. Unsure of the soundness of the United States' security guarantees or the use of trying to collectively counter China through regional blocs, many countries are moving toward unilateral action. To varying degrees, nations with the means to do so are boosting their militaries, while weaker states are downplaying territorial disputes in pursuit of cooperation with Beijing in other areas. For many in Southeast Asia, Donald Trump's election to the U.S. presidency and the dubious fate of the Trans-Pacific Partnership (TPP) will only reaffirm doubts about Washington's economic and security commitments to the region. This dynamic, complicated by an unsettled political landscape in both countries, will make for an unpredictable couple of years for U.S.-Malaysian relations. Still, turning away from the West would run counter to Malaysia's long-term regional strategy and heighten domestic political pressure.

For one thing, Najib will not want to risk validating the opposition's claims that he is selling off state-owned assets to the Chinese for short-term political gain. In Malaysia, where the ethnic Malay majority harbors deep suspicions of the country's own politically and economically powerful ethnic Chinese population, such allegations could be especially damning, all the more so in an election year. As the vote approaches, Najib will play to his ethnic Malay base while also trying to assuage concerns among the Chinese-dominated business community, which Beijing has long used to cultivate economic and political ties in Malaysia.

For another, Malaysia's role as a hub of industry and technology in Southeast Asia — and in the world of Islamic finance — depends on a steady and predictable business environment. Investors look elsewhere when political uncertainty seems to threaten policy continuity in the country. That foreign ownership of Malaysian government bonds is among the highest in Asia reflects investor faith in the country's long-term prospects and underlying fundamentals, but it also exposes Malaysia to greater volatility if political upheaval erodes this confidence. Najib may hope that his outreach to Beijing will give outside powers pause before delving deeper into the 1MDB affair, but his efforts are unlikely to deter further investigations. Ultimately, Kuala Lumpur's focus will return to restoring its credibility among investors.

Furthermore, the pact's dim prospects notwithstanding, Malaysia's participation in the TPP reflects its goal of eventually integrating with the West. The country is intent on moving up the manufacturing value chain, placing greater importance on investment from Europe, Japan, Singapore and the United States; Chinese trade and financing are merely an expedient solution to Malaysia's immediate problems.

Meanwhile, Najib — like Philippine President Rodrigo Duterte — can ill afford being seen by his electorate as selling out his country's sovereignty in the South China Sea or renouncing vital support from the United States in areas such as counterterrorism. Both the military imbalance with China and the internal jihadist threat will far outlast the current election season. As domestic troubles and regional uncertainty cloud Malaysia's long-term vision, it has little choice but to keep its options open.

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