Surprise Election Results in Malaysia a Rebuke of Chinese Investment in the Country

On May 10, Mahathir Mohamed and his opposition block, Pakatan Harapan, emerged as confirmed victors in the Malaysian general elections held on May 9.  He defeated the pro-Beijing incumbent, Prime Minister Najib Razak, and his Barisan Nasional coalition, which has held power in Malaysia since 1957.  Mahathir’s victory could spell trouble for major Chinese projects in the country, as Najib’s aggressive courting of Chinese investment (including transactions that appeared designed to bail out his scandal-ridden 1MDB sovereign wealth fund) was an issue that was front-and-center during the campaign.  Major projects currently being discussed or pending include China’s upcoming bid for the Kuala Lumpur-Singapore High Speed Rail and the Alibaba-led Digital Free Trade Economic Zone currently underway in Malaysia.

During his campaign, Mahathir indicated that Kuala Lumpur “may” renegotiate some terms of Chinese deals that he and his coalition partners view to be unfavorable to the host economy and creating unhealthy economic and financial dependencies.  The East Coast Rail Link (ECRL) being undertaken by China Communications Construction Company is one project that was advocated for by Najib, despite consistent controversy over its increasing costs, potential negative environmental implications, significant project delays, and, recently, its exemption from Malaysia’s controversial goods and services tax (GST).

In 2017, Malaysia was the fourth largest recipient of Chinese investment, with financial commitments estimated at $34.2 billion in BRI-affiliated infrastructure investment projects.  Najib was instrumental in pushing for this increased Chinese E&F activity in the country and, indeed, drew a hard distinction between him and Mahathir on this issue of being a choice between welcoming versus estranging the Chinese.  Given the election results, there is even speculation that Najib’s defeat could have legal complications surrounding alleged corruption involving 1MDB from which he has thus far been shielded.

Malaysian markets took a plunge on Thursday following Mahathir’s victory, likely due to speculation that moves to review Chinese investment could cause instability and undermine growth expectations.  Potentially harming his argument, Najib even asserted on the campaign trail that voting for Mahathir was dangerous, due to the danger of angering Beijing – inadvertently making the case of the opposition that Chinese investment brings a certain amount of political influence and control.  Nevertheless, the market response to the election could serve to temper Mahathir’s near-term decisions on these issues.