Economists say restrictions will affect limited areas of Malaysia’s economy

EVERY day, bus loads of Chinese tourists will arrive at the Mitsui Outlet Park KLIA Sepang to snap up bargains on their last round of shopping before going back to China.

It is a welcome sight for the project’s joint developers – Mitsui Fudosan of Japan and Malaysia Airports Holdings Bhd, as the factory outlet shopping mall, located 60km from Kuala Lumpur and 6km from KLIA and klia2, is built with capturing the growing traffic of Chinese tourists to the country in mind.

Tourists from China are mostly flush with cash, and they are known to be big spenders on overseas trips.

Indeed, Malaysia’s appetite for Chinese money to help stimulate its economy – be it in the area of tourism, real estate purchases, foreign direct investments (FDI) or trade – has been growing in recent years. This is in tandem with the rising affluence of China’s population.

But such anticipation has somewhat turned into anxiety of late, as questions and uncertainties arise over the wider implications of China’s capital controls – a measure that has been implemented since late last year to curb the outflow of funds from the world’s second-largest economy and to stabilise the yuan’s exchange value – on Malaysia’s economy.

Such concerns are likely over-exaggerated, according to some economists and analysts, as they point out that the new capital restrictions will affect limited areas of Malaysia’s economy. There is unlikely to be any impact on Chinese tourism in Malaysia as well as FDIs in infrastructure and construction projects as many of their participation in them are deemed “strategic” to China’s economic and national interests.


As China’s Premier Li Keqiang told a press conference in March, genuine business deals, personal travels and education would not be affected by the country’s capital controls.

This was echoed by China’s ambassador to Malaysia Dr Huang Huikang, who told the local media recently that “what is permitted and what is not is clear-cut” in the control of China’s capital outflow.

Huang noted that while the ruling would not prohibit Chinese citizens from buying overseas properties, purchases of non-strategic business interests such as football teams or cinemas in foreign countries would be prohibited.

That probably sheds some light as to why the overseas deals of Chinese property giant Dalian Wanda Group, which has been investing in foreign cinemas in recent years, have been hit.

Strategic interests

The Malaysian Government has been trying to court Wanda to participate in the Bandar Malaysia development project in Kuala Lumpur. This followed the termination of the sale deal, involving a 60% stake in the project, to IWH CREC Sdn Bhd in May.

IWH CREC is a 60:40 joint-venture between Iskandar Waterfront Holdings Sdn Bhd (IWH) and China Railway Engineering Corp (CREC), which is a state-owned enterprise (SOE).

But with Wanda now facing restrictions in moving funds abroad amid China’s crackdown on capital outflows, the likelihood of its participation in the Bandar Malaysia project will be minimal.

Speculation is rife that IWH CREC will be able to reinstate its participation in Bandar Malaysia, as the conglomerate stands a good chance to win the bid for the deal, says an analyst with a local banking group.

“The Chinese government’s interest in the Bandar Malaysia project has waned, as is clear from the May meeting between Prime Minister Datuk Seri Najib Tun Razak and China’s leaders in Beijing… we expect China’s government through its SOEs to be in a strong position to gain from the Wanda fallout,” the construction analyst, who declines to be named, tells StarBizWeek.


Significant development: With Wanda now facing restrictions in moving funds abroad amid China’s crackdown on capital outflows, the likelihood of its participation in the Bandar Malaysia project will be minimal.

“After all, there are strategic interests in the project for the Chinese government – and Malaysia can capitalise on this, while working on further deepening of ties between two countries,” he adds.

Bandar Malaysia is a significant project, as the 486acre development at the old airport site in Sungai Besi, will house the Kuala Lumpur-Singapore high-speed rail (HSR) terminus and become a central transport hub with connections to the mass rapid transit lines, KTM Komuter, Express Rail Link and 12 other highways. The project is expected to be completed within the next 15 to 20 years.

China is expected to participate in the upcoming tender for the KL-Singapore HSR project which will likely be called in the fourth quarter of this year.

Over the week, Second Finance Minister Datuk Johari Abdul Ghani described Chinese investments in Malaysia as being “more focused and meet the needs of the current national development projects”. He noted that Malaysia is in a strategic position to leverage and capitalise on China’s economic growth.

Close ties

Last November, Malaysia and China signed 14 deals, worth a combined RM144bil, to seal their cooperation in the area of infrastructure and construction development in Malaysia. Among the projects are the RM55bil East Coast Railway Line (ECRL) project; the US$7.4bil (RM32.6bil) Melaka Gateway project; the RM2.5bil Trans-Sabah Gas Pipeline and the RM4bil Wuxi Suntech Power Co Ltd manufacturing project in the Malaysia-China Kuantan Industrial Park.

To allay fears, Huang has earlier said that despite the new capital-control ruling, Chinese investments in Malaysia are still going on smoothly, as most of the projects are government-to-government initiatives and genuine business activities.

In addition, some of the projects fall under China’s Belt and Road Initiative (BRI) that supports a diverse array of programmes that could enhance connectivity between Europe and Asia as well strengthen China’s economic and security interests.

Such is the case for the ECRL, KL-Singapore HSR, the RM1.3bil Xiamen University Malaysia, the RM4bil Kuantan port expansion, the RM3bil Kedah Integrated Fishery Terminal project, among others.

So far, the Chinese government has spent US$50bil on overseas projects linked to the BRI initiative that covers 65 countries.

In terms of Malaysia’s planned port and railway projects, China’s investments would likely reach RM400bil over the next two decades, according to a recent estimate by Citi Research.

China is the largest foreign investor in Malaysia.

Data from Malaysia Investment Development Authority showed that in 2016, a total of 33 China-led projects valued at RM4.8bil was approved. This was almost double that of 2015’s tally of 17 projects worth RM1.9bil.

Uninterrupted flow

According to economist Lee Heng Guie, while China’s stringent capital controls can slow new investments in Malaysia, existing projects with Chinese involvement in the country will unlikely be affected due to their strategic value.

“China’s capital controls that subject many overseas deals to reviews of strict control are expected to put a damper on extra-large merger and acquisitions (M&As) as well as real estate purchases and investments abroad; and Chinese companies will not be as enthusiastic as they used to be about pouring money into overseas projects that are not related to their core business,” says Lee the executive director of Socio-Economic Research Centre.

He adds the capital controls could also affect new Chinese investments heading overseas – including Malaysia – but he argues: “Forex restrictions will have limited impact on projects under the BRI initiative as they are largely infrastructure-oriented and are critical to China’s geo-economic strategy.”

Similarly, Zhang Miao, research fellow, Institute of China Studies, Universiti Malaya, says concerns over the impact of China’s capital controls on BRI projects are unfounded.

“Most BRI projects in Malaysia led by China’s SOEs are infrastructure projects that are encouraged by the state government mainly due to China’s own geopolitical consideration, as well as the need to address the overcapacity problem in certain industries such as cement and steel which are closely linked to infrastructure,” Zhang tells StarBizWeek.

Noting that most of top management personnel in SOEs are appointed by the Chinese government, Zhang says, to be politically right is often more important than being commercially profitable.

“There is no strong reason for SOEs managers to invest in sectors affected by tight capital controls. Therefore, it is very unlikely that the BRI projects could be influenced by the tightening-up of the capital control,” she explains.

Zhao stresses that it is the so-called non-strategic sectors such as real estate, filming-making and football clubs that are being targeted by the Chinese government in stemming the capital flow.

China has started scrutinising deals and projects of its homegrown companies abroad and fund repatriation by individuals, particularly towards mega property investments and doubtful M&As since November last year.

Under the capital-control policy, remittance of funds by Chinese companies for overseas deals would be restricted to approved business purposes, and they would have to get special approval from the People’s Bank of China and other local regulatory authorities.

The currency exchange quota for Chinese individuals, on the other hand, remains unchanged at US$50,000 (RM214,500) per person per year, but there are additional restrictions that make it difficult for one to exchange yuan for foreign currencies.

For instance, all buyers of foreign exchange must sign a pledge that they won’t use their quotas for offshore property investment. Violators would be added to a watch list, denied access to foreign currency for three years and be subject to a money-laundering investigation.

On that note, there have been reports about some Chinese buyers of the high-end Forest City residential development in Johor Baru being affected.

According to a Bloomberg report last month, some Chinese buyers would likely walk away from their sale and purchase agreements for the Forest City project due to concerns about breaking the rules amid the ongoing crackdown on capital outflows from China.

It remains to be seen how the RM100bil mixed project, developed by China-based Country Garden Holdings Co, will be affected as 80% to 90% of Forest City buyers are from China.

On that note, it will likely take several more months to fully understand how significant the impact of China’s capital controls is. In the meantime, all economies craving for Chinese money will j have to adjust to the new rule of the game set by China.

The Star


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