Reports. In-depth reports on the risk factors and threat implications of economic and financial statecraft.

Over the past several decades, the economic and financial relationship between Kuala Lumpur and Beijing has grown considerably, with clear political implications that have become more pronounced over the past few years. Moreover, Malaysias position along the Strait of Malacca increases the stature bestowed on the country by Beijing as a valued strategic partner.

Although Kuala Lumpur has seemingly pursued a strategy of hedging between East and West, the relationship with Beijing under the present tenure of the embattled Prime Minister Najib Razak has arguably been as friendly as it has been in recent memory. In addition to emerging as Malaysias largest single trading partner, China reportedly overcame the U.S. as the largest investor in the country in 2015 due to several significant investments at the end of the year (linked to the 1MDB scandal).

Traditionally, Malaysia has relied more on the West for foreign investment (i.e., Japan, Singapore, the U.S., etc.) than on China. From 2003 to 2012, only 3% of total Chinese FDI in Southeast Asia went to Malaysia. After the ascension of Prime Minister Najib in 2009, however, this trend began to shift, as Chinese FDI activity in the country became more significant, increasing upwards starting in 2010 and particularly focused on infrastructure. Most recently, Chinese mergers and acquisitions (M&A) in Malaysia were among the worlds most prominent.

As Prime Minister Najib has sought to extract himself from a number of high-profile scandals, there is concern that Chinese investments in Malaysia, which have helped to dig the Prime Minister out of these suffocating controversies, will influence the countrys ability to think critically about issues related to China (especially with regard to national and regional security). Similar to Beijings approach to other countries, Chinese investments may, in part, be a strategy to secure diplomatic loyalty, particularly in thwarting any ASEAN initiatives deemed insulting by Beijing.

For fear of disrupting economic relations, the Malaysian leadership has generally (though not necessarily always) been less vocal about Chinas illegal and provocative actions in the South China Sea, including its island-building/militarization efforts, and has expressed its preference to address related concerns, as Beijing has requested, through bilateral, private discussions.

Excerpted Deals and Transactions:

• A $2.3 billion purchase of 1Malaysia Development Berhad (1MDB) by China General Nuclear Power Corp. (CGNPC) of 100% of the funds energy assets, collectively held by Edra Global Energy (comprised of 13 power and desalination plants, making up 14% of the countrys total power assets), instantly made CGNPC the second largest independent power producer in Malaysia.

• China Railway Engineering Corp. purchased, for $1.7 billion, 1MDBs 60% share in Bandar Malaysia, a property development complex that is to house a terminal for the planned Kuala Lumpur-Singapore high-speed railway. There is concern that this investment was made strategically to gain a leg up in the bidding competition for this broader $11 billion railway project.

• Huawei was granted a contract to construct the Malaysia-Cambodia-Thailand (MCT) Submarine Cable System, a 1,300 km submarine cable network connecting between Malaysia and Thailand, as well as Chinas strategic port in Sihanoukville, Cambodia and eventually connecting terrestrial networks through Laos and Myanmar.

• China has pledged some $10 billion to fund the development of a massive 246 hectare Malacca Gateway project, emblematic of the importance it attributes to Malaysia with regard to its One Belt, One Road initiative. The project, located at Malacca City, involves the development of a series of artificial offshore islands, a deep-sea port at Ocean Park as well as commercial and residential property complexes.

• The deep-water Kuantan Port is being developed by a joint venture involving Chinas Guangxi Beibu Gulf Holding (Hong Kong) Ltd. The port sits on the South China Sea facing China, near Singapore, along a strategically important shipping lane.