Burdened With Debt, Malaysia Cancels China’s $22Bn Belt and Road Projects for Now

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The $20bn rail project was centerpiece of China’s infrastructure push in Malaysia but work has been suspended pending discussions over pricing and graft accusations

AUG 21, 2018: Malaysia will shelve three China-backed projects worth a total $22 billion until the debt-laden Southeast Asian nation can afford to pay for them, Prime Minister Mahathir Mohamad said during a visit to Beijing on Tuesday.

The projects include a railway connecting Malaysia’s east coast to southern Thailand and Kuala Lumpur, and two gas pipelines — part of China’s ambitious Belt and Road initiative (BRI).

“I explained to (the Chinese leaders) why we can’t have the ECRL (East Coast Rail Link),” Mahathir told Malaysian reporters at the end of his five-day visit, saying the project “will be deferred until such time when we can afford (it)”.

Malaysia received financing terms for the ECRL, with 85% of the project financing, including a soft loan at 3.25% from China Exim Bank, coming with a moratorium period of seven years, and the balance of 15% to be funded through a sukuk program managed by local investment banks.

“It’s about borrowing too much money, which we cannot afford, we cannot repay, and also because we don’t need those projects for Malaysia at this moment… our problem now is how to solve our financial deficit.”

Mahathir is trying to reduce Malaysia’s national debt, which has ballooned to around $250 billion and had vowed repeatedly before his China visit to discuss the “unfair” Chinese infrastructure deals authorized by former premier Najib Razak.

Najib courted Chinese investment and was a cheerleader for President Xi Jinping’s signature Belt and Road Initiative in Southeast Asia during his decade-long rule, but Mahathir has questioned the value of the deals and the risk that they would leave Malaysia “indebted” to Beijing.

Chinese foreign ministry spokesman Lu Kang acknowledged that “any cooperation between the two countries will inevitably lead to problems of one kind or another”.

“We take a long-term view of the relationship between our two countries and will resolve the issue through dialogue and negotiation,” Lu told a regular press briefing.

After meeting Premier Li Keqiang on Monday, Mahathir said he believed China would help Malaysia resolve its fiscal problems.

The Malaysian leader also warned against “a new version of colonialism happening because poor countries are unable to compete with rich countries just in terms of open free trade”.

The $20-billion rail project was given to China’s largest engineering firm, the China Communications Construction Company, and mostly financed by a loan from the Export-Import Bank of China.

The project was the centerpiece of China’s infrastructure push in Malaysia but work has been suspended pending discussions over pricing and graft accusations.

Malaysia’s finance ministry said in July that 88 percent of the cost of the two gas pipelines worth $2.32 billion had been paid to their Chinese contractor despite only 13 percent of the work being completed.

One pipeline is in Malaysia’s Sabah state on Borneo island and the other runs from Malacca in peninsular Malaysia to the northern state of Kedah.

“We do not find the need for… (the pipeline projects),” Mahathir said. “It costs too much money. And we have to cancel or defer it to a later stage.”

In May, Mahathir shelved separate plans to build a high-speed railway between Singapore and Malaysia which had been agreed several years ago, saying it was too costly.

Despite the threat to revise China-linked contracts, Mahathir sought to strengthen business ties with Beijing during the trip.

China is the top trading partner of Malaysia, which is home to a substantial ethnic Chinese minority.

Relations were warm under the previous government of Prime Minister Najib Razak, and Chinese investment in the country surged as Beijing signed deals for major infrastructure and construction projects.

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