Monday, December 9, 2013, 09:59
Partnership push
By Elaine Tan in Kuala Lumpur

China and Malaysia stand to benefit from trade agreements as bilateral cooperation flourishes

Partnership push

China in 1974 was a country on the cusp of an extraordinary transformation. Its leadership was evolving, and the foundations of what would be the world’s fastest-growing economy were about to be put in place.

It was against this climate of change that Abdul Razak, Malaysia’s second prime minister, made a historic visit to Beijing in May, 1974. On the eve of his trip, he declared at a news conference: “I am going on a journey of goodwill and friendship to sow the seeds of mutual understanding between Malaysia and China.”

Shortly after, Malaysia became the first Southeast Asian nation to establish diplomatic ties with China — a diplomatic coup that still bears significant goodwill to this day. Abdul Razak’s hand of friendship paved the way for strong bilateral relations that have been on a continuous upward trend over the last 39 years.

“Mutual trade dependence; the turbulent US and European economic climate; the emergence of China as the economic superpower; as well as Malaysia’s potential to act as a gateway for China into other Southeast Asian countries and regional markets, have all fueled the growth of this relationship,” says Baharom Abdul Hamid, a senior lecturer at Taylor’s University, Malaysia.

Trade is at the cornerstone of Sino-Malaysian ties. China became Malaysia’s biggest trading partner in 2009 after overtaking the United States, while Malaysia topped the 10-member Association of Southeast Asian Nations (ASEAN) as China’s largest trading partner over the last five years.

According to Khor Yu Leng, a visiting fellow at the Institute of Southeast Asian Studies, writing in ISEAS Perspective, this relationship is heavily focused on electronics and electrical products.

Her report, titled The Significance of China-Malaysia Industrial Parks, states that some key imports to Malaysia from China are electronic integrated circuits, automatic data-processing machines, information and communication technology equipment, office equipment, printed circuits, electrical transformers and transport equipment.

Malaysia’s main exports to China are electronic integrated circuits, palm oil and derivatives, automatic data-processing machines, rubber, oil and gas, processed edible oils and semiconductors.

Bilateral trade between the two countries reached $94.8 billion last year, closing in on the $100 billion mark that will make Malaysia the number three trading partner in Asia for China after Japan and South Korea.

But this is significantly imbalanced in favor of the Chinese. Malaysia’s foreign direct investment (FDI) into China in 2012 was 6.3 billion. Conversely, the cross flow from China to Malaysia was only about 10 percent of that — although this has been rising since 2010.

Malaysia is also lagging behind other countries in the region in terms of its share of outbound investments by the Chinese. “There is a lot of room to play catch up,” noted the Economic-Treasury Research unit at United Overseas Bank (UOB).

According to the Heritage Foundation’s China Global Investment Tracker, the combined investment and contracts out of China into ASEAN amounted to $66.6 billion as of June, about a tenth of the worldwide total of $688 billion.

“Of this, the amount invested in Malaysia is about $9 billion, which is behind Indonesia ($25.9 billion) and Vietnam ($11.2 billion), but ahead of Singapore ($8 billion) and Laos ($7.1 billion),” UOB reported.

Nevertheless, Sino-Malaysian ties are on an upward trajectory with Chinese President Xi Jinping visiting Kuala Lumpur in October — his second visit to a Southeast Asian country, after Indonesia, since assuming office in March.

Xi described his connection with Prime Minister Najib Razak as “yi jian ru gu” (translated as a meeting of old friends for the first time). He told the business community in his keynote speech at the Malaysia-China Economic Summit: “Our two countries have proven to be good neighbors, good friends and good partners who go through thick and thin together.”

UOB said: “This is a significant visit because both countries have agreed to deepen their already extensive economic ties and elevate bilateral ties into a formal comprehensive strategic partnership.” Both leaders signed a five-year program on economic and trade cooperation that will see two-way trade nearly triple to $160 billion by 2017.

In a statement, Malaysia’s Ministry of International Trade and Investment said sectors of focus for deeper bilateral cooperation under the pact are agriculture, manufacturing, industrial parks, infrastructure, energy and mineral resources, information and telecommunications, tourism, engineering services, halal industry, logistics and retailing.

This is divided into early harvest projects such as the Malaysia-China Kuantan Industrial Park, Qinzhou Industrial Park and the Kuantan Port expansion project, plus new cooperation projects to be explored by the public and private sectors.

Examples of new cooperation projects include: Manufacturing of medical devices; technical exchanges; solid waste treatment and recycling; energy saving and emissions and pollutants reduction. There is also cooperation in emerging forms of trade such as franchising, e-commerce and emerging business models capitalizing on online trade platforms and engineering contracting.

China’s import is forecast to exceed $10 trillion and outbound investments total $500 billion in the next five years. Malaysia is targeting to capture 5 percent of that outflow.

Assuming the role of a gateway to the Association of Southeast Asian Nations (ASEAN) could certainly help expedite this goal. Southeast Asia has a combined population of 600 million and an economy of more than $2 trillion. When the ASEAN Economic Community combines strength as one entity in 2015, it will be the eighth largest economy globally.

Anbound Research Center in Malaysia, part of the Beijing-based independent think tank Anbound Consulting, says Malaysia can leverage its regional knowledge, expertise and successful track record to divert Chinese FDIs through the country to its neighbors.

“ASEAN is not just a market for cost-competitive consumer products that China is known for, but also its capabilities in infrastructure and engineering projects. The revival of the Malacca-Indonesia bridge proposal is an example where China would be able to capitalize on its engineering prowess as well as investment capability,” added UOB.

Both countries can also collaborate on high-impact sectors in which Malaysia has capabilities that can be developed further with China’s investments. UOB identifies the agriculture and commodities sectors as potential targets: “This also creates an opportunity for China to access sources of raw materials, such as palm oil, rubber, crude oil/gas, minerals and forestry products, which it lacks on its home ground.”

There are some 12 sectors under Malaysia’s Economic Transformation Programme — oil, gas and energy; financial services; palm oil and rubber; tourism; electrical and electronics; business services; communications content and infrastructure; education; agriculture; healthcare and wholesale and retail sectors — in which China and Malaysia can work together.

“We suggest that both countries aim for a middle point between current provisions in ACFTA (ASEAN — China Free Trade Area) and CEPA (Comprehensive Economic Partnership Agreement between Hong Kong and China) in deciding their bilateral investment arrangements in order to facilitate greater investments,” says Edward Foo, director of Anbound Malaysia.

“Having the Chinese government amend regulations for the overseas listing of its State-owned enterprises and small and medium-sized enterprises in Malaysia; the establishment of a futures market system with Malaysia and lowering the eligibility requirement for Malaysian banks to apply for qualified foreign institutional investor status in China are some of the starting points,” says Foo.

In external trade, Malaysia stands to expand its surplus by meeting the growing domestic demand of what will be the world’s largest market by 2018. China is currently Malaysia’s largest import source and second largest export destination.

The Malaysian products suggested by Anbound for export to China include petrochemical outputs, palm oil, biogas, rubber and medical devices. Services suggested are financial advisory, corporate consultancy, higher education, urban development know-how and infrastructure.

“As China prepares to open up its services sector, Malaysia can also provide expertise from its more established banking, electronics and healthcare sector,” UOB suggested.

For China Business Weekly