China, being the world’s second-largest economy and the largest trading country, is the key trading partner for numerous countries.
This includes the South-East Asian economies, where Malaysia, together with other South-East Asian countries such as Singapore, Thailand and Vietnam are ranked among the top 10 most connected countries with China via trade (Yu, 2017).
According to the United Nations Conference on Trade and Development (2021), China’s outward foreign direct investment (FDI) stood at US$133bil as of 2020, rendering it the world’s largest investor.
China’s trade and investment have garnered more attention in recent years, notably after the introduction of the Belt and Road Initiative (BRI) by the Chinese government.
One of the primary strategic priorities of the BRI is to accelerate the internationalisation of Chinese firms and create world-class multinationals and supply chains, which can be regarded as the next stage of China’s “Go Global” policy introduced in 1999.
The BRI also supports the country’s industrial restructuring effort as Chinese firms learn to compete in the international arena, adopt international best practices, develop scale in foreign markets and acquire world-class technologies (Baker McKenzie, 2017).
Internationalisation presents the opportunity to the Chinese firms to increase their exports and direct investments, which over time has solidified and widened China’s influence over the Silk Road region’s supply chain. From China’s viewpoint, South-East Asia is an indispensable strategic partner to ensure the BRI’s success.
The recent decade has witnessed a rising trend of exports to BRI countries supporting infrastructure-related projects and other general demands, such as the exports of construction-related materials namely equipment, steel, iron, copper and chemical products.
Majority of the BRI infrastructure projects are developed through joint ventures between a BRI host country entity and a Chinese entity. These joint ventures implement their projects either by concessions or direct government procurement.
In Malaysia, the Melaka Gateway Project is an example of a concession project while the East Coast Rail Link (ECRL) and Gemas-Johor Baru Electrified Double-Tracking are government procurement projects. Besides, Chinese developers are also jointly developing industrial parks with BRI host country entities.
In Malaysia, the Malaysia-China Kuantan Industrial Park (MCKIP) is the first to be accorded “National Industrial Park” status in the country. Jointly developed by Malaysia and China, MCKIP is the sister park of China-Malaysia Qinzhou Industrial Park in China.
Collectively, known as the “Two Countries, Twin Parks”, these industrial parks aim to optimise the flow of trade and investment between both countries and enhance the regional supply chain management.
According to the Malaysia External Trade Development Corporation (2021), as of 2020, China’s total trade with Malaysia amounted to RM329.8bil, which made up 18.6% of Malaysia’s total trade.
Meanwhile, the Malaysian Investment Development Authority (2021) reports that China’s FDIs to Malaysia amounted to RM18.1 billion in 2020, making China the top source of FDI to Malaysia.
Among the key players who have embarked on this internationalisation strategy from China are Chinese state-owned enterprises who have participated or invested in numerous projects in Malaysia, such as China Communications Construction Company Limited (transportation), Beibu Gulf Port Group (real estate) and China General Nuclear Power Group (energy).
Chinese private-owned enterprises are also increasingly involved in this outbound activity. In Malaysia, these include Alibaba Group and Tencent (e-commerce), Zhejiang Geely Holding Group (automotive), Huawei (technology) and SenseTime Group Limited (artificial intelligence).
Although exports remained as one of the primary drivers of growth of the Chinese economy since global supply chains rely very much on Chinese manufacturing, Chinese manufacturers are finding it more and more challenging to sustain their profit margins due to rising production costs, coupled with uncertainty in global demand and volatility of the renminbi.
These adverse developments have driven the Chinese manufacturers to relocate their low value-added operations to lower-cost countries such as Malaysia.
According to Prime Minister Datuk Seri Ismail Sabri Yaakob, during his opening address at the Global Chinese Economic & Technology Summit 2021, China was Malaysia’s largest foreign investor in the manufacturing sector from 2016 to 2020 and the investment from China has created 50,000 job opportunities in the country (Tan, 2021).
Moreover, the Chinese manufacturers realised that they cannot fully depend on the traditional export-led growth model. Instead, they need to move up the value chain towards higher value-added sectors such as high-technology to improve their profit margins.
This is also in line with China’s ambition to transform the country into an advanced manufacturing powerhouse by 2025. This has led to higher income economies in the South-East Asian region such as Malaysia to become the main supplier of input to China’s manufacturing sector.
According to CIMB ASEAN Research Institute (2018), Malaysia supplied US$16bil worth of integrated circuits to China in 2016 given the former’s position as a key microchip producer.
Malaysia is expected to play an increasingly pivotal role as the Chinese manufacturers continue to shift into higher value-added sectors, provided that Malaysian firms keep stepping up their research and development investment and innovation to meet the requirements of the Chinese market, which in turn will help to reduce the trade imbalance between both countries.
To conclude, despite the projected economic slowdown in 2022, China’s economy is still anticipated to grow at a faster rate compared to the global average.
In order to sustain its economic growth, the country should continue encouraging and facilitating Chinese firms to engage in international trade and foster more trade cooperation with its major trading partners including Malaysia.
In terms of direct investments, there remains abundant room for development. Special emphasis should be placed on areas such as technology and knowledge transfer as well as sustainable infrastructure development as a means of supporting recovery from the Covid-19 pandemic.
Moving forward, it is hoped that with the recent signing of the Regional Comprehensive Economic Partnership (RCEP) agreement, China and Malaysia, together with other RCEP member countries, will further commit themselves towards strengthening bilateral trade, investment and supply chain integration.
The views expressed here are entirely the writer’s own.
This article first appeared in the Star Online on February 14, 2022.
By: Dr Chow Yee Peng, Senior Lecturer, Tunku Abdul Rahman University of Management and Technology (TAR UMT)
References:
Baker McKenzie. (2017). Belt & Road: Opportunity & risk. https://www.bakermckenzie.com/-/media/files/insight/publications/2017/10/belt-road/baker_mckenzie_ belt_road_ report_ 2017.pdf?la=en
CIMB ASEAN Research Institute. (2018, October). China’s Belt and Road (BRI) and Southeast Asia. https://www.cariasean.org/downloads/CHINA_BRI_AND_SEA_final_lowres.pdf
Malaysia External Trade Development Corporation. (2021). Trade performance for year 2020 and December 2020. https://www.matrade.gov.my/en/about-matrade/media/press-releases/press-releases-2021/5358-trade-performance-for-year-2020-and-december-2020
Malaysian Investment Development Authority. (2021). Malaysia records RM164 billion of total approved investments in 2020 amid global pandemic. https://www.mida.gov.my/media-release/malaysia-records-rm164-billion-of-total-approved-investments-in-2020-amid-global-pandemic
Tan, D. (2021, December 16). PM: Malaysia attractive option for foreign investors. The Star. https://www.thestar.com.my/news/nation/2021/12/16/pm-malaysia-attractive-option-for-foreign-investors
United Nations Conference on Trade and Development. (2021). World investment report 2021. https://unctad.org/webflyer/world-investment-report-2021
Yu, H. (2017). China’s Belt and Road Initiative and its implications for Southeast Asia. Asia Policy, 24, 117-122. https://www.jstor.org/stable/26403210