Malaysia, India, and IMF could spoil two of China’s mega-projects in the Indian Ocean — the China-Pakistan Economic Corridor (CPEC) and the Forest City.
Investors should follow the growing controversy on both projects closely. It could add to the turbulence which has been shaking the markets of the region.
CPEC is a mega-project for both China and its local partner, the Pakistani government. For China, CPEC is the western route to Middle East oil, and to Africa, rich in natural resources.
It also serves Beijing’s strategic ambition to encircle India. And that makes Pakistan a natural ally.
For Pakistan, CPEC could help improve the country’s infrastructure, while boosting economic growth in the process.
Malaysia’s Forest City is an ambitious project, too, for China and its Malaysian partner. For China, Forest City is another destination for its wealthy citizens to escape to, from the rampant environmental pollution at home; and for the government, it is another outpost in the Indian Ocean.
For Malaysia, Forest City is another construction project to create jobs and income for its people. While it lasts, of course. Economists call the project’s impact as the “multiplier effect,” suggesting that there will be many more jobs and income opportunities to come once the project is finished — and once Chinese wealthy residents move in, and begin spending their money on the domestic economy.
Economists call that the “accelerator effect.”
The trouble is that in both cases, Chinese planners and their domestic partners made a couple of miscalculations that threaten to stall both projects indefinitely.
In the case of Forest City, Chinese developers and their local partners miscalculated the prospect of an impending political change in the form of a new government led by Prime Minister Mahathir Mohamad, who seeks to prevent foreign ownership in the project.
That’s certainly a big setback for a project that catered to wealthy foreigners, especially to wealthy Chinese.
In the case of CPEC, Chinese and Pakistani governments’ miscalculation has two parts.
One of them is corruption on both sides of the partnership. That’s why the two countries announced the creation of a “transparency” commission last year. But such commissions rarely help solve corruption — especially when it comes to construction. Construction projects are executed by the governments of the two countries that rank high in corruption.
Meanwhile, corruption keeps on pushing the costs of the project higher by the day, sending Pakistan knocking at the door of the International Fund.
That’s an American-controlled institution, which could either bring transparency to the project or kill it altogether.
Another miscalculation is geopolitics. CPEC runs though Pakistan-controlled Kashmir, an area claimed by India.
So far, China has tried several things to save the two projects. In the case of Malaysia, Beijing has tried to downplay surrounding the Forest City project. In the case of CPEC, Beijing has been trying to have Russia join the CPEC project, according to an article published in Globaltimes last year. It has also offered to change the project’s name, according to reports in the Indian press.
But neither of the two moves seems sufficient to appease India.
That’s something investors in the equity markets in the region should follow closely, as it could add volatility to already volatile markets there.
By Panos Mourdoukoutas
Professor and Chair of the Department of Economics at LIU Post in New York