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2 Malaysia hedges its China
exposure By Ian Storey
The relationship between Malaysia and
China is by mutual consent the best it has ever
been.
On the economic front, two-way trade
is expanding by 20-25% per year, and Malaysia
looks set to cash in on China's growing appetite
for natural gas. Politically, the two sides have
established a high level of trust based on regular
meetings and shared perspectives across a range of
international issues. Malaysia's current prime
minister, Abdullah Badawi, has repeatedly said that
his
government does not view China as a strategic
threat.
Naturally, however, the
relationship is not problem-free. Malaysia has a
large and growing trade deficit with China and the
two countries still have overlapping sovereignty
claims in the South China Sea. Moreover, despite
Malaysian rhetoric concerning China's peaceful
rise, Kuala Lumpur continues to pursue a hedging
strategy that puts a premium on the continued US
military presence in the Asia-Pacific region - a
presence Malaysia quietly facilitates.
In
October 2003, Abdullah succeeded Mahathir Mohamad
as prime minister. Since Abdullah took office, the
fundamentals of Malaysian foreign policy have
remained in essence the same, though the tone has
changed, leading to improved atmospherics with the
United States, Australia and Singapore - all
formerly favorite targets of Mahathir's acerbic
criticism. Under Abdullah, Malaysia's ties with
China too have strengthened across the board.
Economics remains the bedrock of the
relationship. The volume of two-way trade has
expanded from US$14.2 billion in 2003 to $22.5
billion in 2005. [1] According to International
Monetary Fund figures, in 2005, China was
Malaysia's fourth-largest trade partner behind the
US, Singapore and Japan. Since 2000, however,
Malaysia's trade with China has been in deficit,
and the gap is growing - by 2005, it stood at $3.9
billion.
The cause is not difficult to
identify: Malaysian businesses have found it very
challenging, if not impossible, to compete with
Chinese manufactured goods in terms of price and
quality. In response, Kuala Lumpur has encouraged
its business people to exploit niche markets,
especially high-technology areas where Malaysia
still enjoys a comparative advantage over China. A
related concern for Malaysia has been the loss of
foreign direct investment (FDI) to China, an issue
Abdullah has admitted to be a "very important
challenge", according to a December 2005 report in
the People's Daily.
Malaysia has been
particularly concerned about the loss of Japanese
investment. As a result, the government has tried
to take advantage of Japan's "China plus one"
strategy - whereby Japanese businesses are
encouraged not to place all of their investment
eggs in China's basket - by positioning itself as
the "plus one", though Malaysia recognizes that it
faces stiff competition from other Association of
Southeast Asian Nations (ASEAN) members,
especially Vietnam.
Despite the deficit
and FDI concerns, the Malaysian government remains
optimistic about its economic links with China,
and the two sides have set a goal of $50 billion
in bilateral trade by 2010. The export of
Malaysian energy resources to China is likely to
represent a larger share of future bilateral trade
and, to a certain extent, may go toward offsetting
the deficit. Malaysia is one of the world's
leading exporters of liquefied natural gas (LNG),
an energy resource much in demand in China.
Last November, Malaysia's state-owned
energy company, Petronas, won a 25-year contract
to supply Shanghai with 3 million tonnes of LNG
per annum in a deal worth $25 billion - by far the
largest single trade deal between the two
countries. Malaysia is obviously anxious to secure
further LNG deals with China.
The tourism
and education sectors have been other sources of
revenue for Malaysia vis-a-vis China. Since 2000,
Malaysia has relaxed visa restrictions for Chinese
nationals, resulting in increasing numbers of
tourist arrivals. Last year, 439,000 Chinese
citizens visited Malaysia, up from 350,000 in
2003, despite negative publicity in late 2005 over
allegations that Chinese tourists had been poorly
treated.
In addition to the tourist trade,
Malaysia has been keen to attract Chinese students
to its higher-education institutions and has
achieved a large measure of success; in 2003,
11,000 Chinese nationals were enrolled in
Malaysian courses, representing 25% of all foreign
students and their largest single group. The entry
of large numbers of Chinese nationals has,
however, raised security concerns, as it is
estimated that tens of thousands remain as illegal
immigrants or move on to third countries.
As is the case elsewhere in Southeast
Asia, as bilateral relations have grown closer,
Malaysia has demonstrated increased deference to
China over political sensitivities such as Taiwan
and the Falungong spiritual protest group.
Malaysia has banned its government ministers from
visiting Taiwan, and in July 2005, the government
prevented the distribution of an allegedly
pro-Falungong newspaper at the request of the
Chinese Embassy.
China appreciates
Malaysia's support on these issues and values its
overall relationship with Kuala Lumpur. China
recognizes that Malaysia is a very influential
player within ASEAN and the various ASEAN-driven
forums such as the ASEAN Regional Forum (ARF) and
the East Asian Summit process.
It would be
a useful diplomatic asset for Beijing to have an
influential voice within these forums that is well
disposed toward China. At the strategic level,
China is also keen to court Malaysia, because it
is a littoral state of the Strait of Malacca,
through which 80% of China's energy imports
transit. As noted elsewhere, Chinese security
planners view the strait as a strategic
vulnerability, because the country's navy is
incapable of protecting the sea lines of
communication that pass through the strait,
resulting in the so-called "Malacca dilemma".
In 2004, Malaysia angrily rejected the
idea, as an infringement of its sovereignty, that
the United States should help the littoral states
tackle transnational security threats such as
piracy and terrorism by stationing military forces
in the strait. China would not like to see a
greater security role for the US, Japan or India
in the Malacca Strait, and it quietly applauded
Malaysia's stance. In a gesture of support, China
offered to help Malaysia enhance security in the
strait by providing intelligence and information
exchange. Malaysia may also play a role in helping
China mitigate its "Malacca dilemma".
This
April, it was announced that Kuala Lumpur had
given the green light to a private consortium to
build an oil pipeline through
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