China seems 'worried' about Malaysia's new leadership, and a suspicious $2 billion deal could be the first sign of trouble

Malaysia's new Prime Minister Mahathir Mohamed has repeatedly said he will be reevaluating Chinese investments in the country, including those that are part of Belt and Road Initiative.
This week, Malaysia's finance minister said it is referring payments worth $2 billion for Chinese-built pipelines to the anti-graft commission because of a potential connection to a financial scandal linked to former Prime Minister Najib Razak.
The probe could be a bad sign for other Chinese investments, including a $14 billion railway joining Malaysia's coasts.
Chinese think tanks and state-funded firms closely watched the live results of Malaysia's election in May and seemed concerned about the future of foreign investment in the country.

Since gaining independence from Britain in 1957, there had never been a change of power in Malaysia — until last month.

Malaysia's opposition alliance staged a historic win at the ballot boxes, seizing power from the incumbent Prime Minister Najib Razak who had been plagued with financial scandals. Instead, voters picked the 92-year-old opposition figure and former prime minister, Mahathir Mohamad.

It's a seismic shift, and one unlikely to please China.

On the campaign trail, and even as he was sworn in, Mahathir brought up the need to review Chinese investments in Malaysia, which is a crucial country in President Xi Jinping's expanding Belt and Road Initiative (BRI). It could also hint at Mahathir's potential desire to reassess the economic, and potentially diplomatic, relationship between the two countries.

Euan Graham, the director of the Lowy Institute's international security program, told Business Insider after the election that Beijing is likely nervous about Mahathir taking office.

"Would China be happy with the result? I suspect they will be rather worried because Najib has been almost taken for granted as a pliable figure," Graham said.

Najib rarely protested China's claims in the South China Sea, and instead oversaw as much as $93 billion in Chinese investments for port and railway projects.

There was even a potential plan in 2016 for a Chinese construction company to be awarded a domestic rail project linking Malaysia's two coasts, in exchange for paying $850 million for assets from 1MDB, the state investment fund from which hundreds of millions of dollars were reportedly found in Najib's personal bank accounts the year prior.

That $14 billion project is one Mahathir has flagged as being possibly "unnecessary" and "strange," as he put it, saying he would try to renegotiate the deal with China.

"Mostly it was about trying to make the prime minister [Najib] popular and it cost billions of dollars," Mahathir recently told the Financial Times.

And the Mahathir government's latest move likely have China even more worried.

Malaysia is investigating a Chinese project that already cost $2 billion

Days into the job as prime minister, Mahathir announced the country's "staggering" debt was far greater than Najib indicated. Malaysia owes $251 billion, which accounts for about 80% of its GDP.

The flow-on effect is Mahathir's government appears to be looking at more expensive infrastructure projects that can be cut.

Malaysia's Finance Minister Lim Guan Eng announced on Tuesday that the Najib government paid a Chinese firm $2 billion, which is nearly 90% of the value for two pipeline projects that are less than 15% complete.

Payments scheduled for the two pipelines, which were being built by the China Petroleum Pipeline Bureau and organized by Najib's office, were arranged by date — like bill payments — rather than coinciding with project milestones.

Lim has referred the payments to the anti-graft commission, and said it is considering seeking Beijing's help regarding the potential role of money laundering.

"We are strongly suspicious this is all part of the 1MDB scam," Lim said.

Just last week, Mahathir canceled a multi-billion dollar high-speed rail link to Singapore because the prime minister believes it won't bring money into the economy.

Chinese firms were worried on the night of Malaysias election

As election results rolled in on the evening of May 9, Chinese companies were clearly concerned about the unknown world Malaysian politics was entering.

Will Fung, a lawyer based in Beijing who traveled back to Malaysia to vote, told Business Insider he was contacted by Chinese firms almost immediately.

"As we are watching live results last night, a few Chinese think tanks and especially state-funded organizations were keeping a very close monitoring of the results, and wanted my feedback as a chamber head," said Fung, who is also the chairman of the Malaysian Chamber of Commerce and Industry in China. "I reiterated that Malaysia will continue to be a destination for foreign investments, the difference is we are going to be more transparent."

Fung also said that ahead of Malaysia's election, a lot of Chinese media were reporting as though Mahathir was "anti-Chinese."

"That’s a misperception that I have tried to explain to them, that there is a need to [seem this way] by Mahathir if trying to win the election and get local Malay support."

But with so many projects potentially being tainted because of their close ties to Najib and 1MDB, Mahathir may start taking a harder line on Chinese projects.

According to Graham, Mahathir's relations with the US were "famously scratchy," and the former prime minister had a far more Pan-Asian approach when he led Malaysia before Najib.

Graham continued: "The question is whether the Pan-Asian sentiment will play in China's favor or whether the China relationship has become, to some extent, toxified by the questions around Najib's financial dependence on China and his association with corruption scandals."

China seems 'worried' about Malaysia's new leadership, and a suspicious $2 billion deal could be the first sign of trouble

Malaysia is investigating a Chinese project that already cost $2 billion

Chinese firms were worried on the night of Malaysias election

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