Malaysia’s Hedging Strategy with China

Publication: China Brief Volume: 7 Issue: 14

The relationship between Malaysia and the People’s Republic of China (PRC) is, by mutual consent, the best it has ever been. On the economic front, two-way trade is expanding by 20-25 percent 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 U.S. 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 essentially the same, though the tone has changed, leading to improved atmospherics with the United States, Australia and Singapore—all favorite targets of Mahathir’s acerbic criticism. Under Abdullah, Malaysia’s ties with China have strengthened across the board. Economics remains the bedrock of the relationship. The volume of two-way trade has expanded from $14.2 billion in 2003 to $22.5 billion in 2005 [1]. According to IMF figures, in 2005, China was Malaysia’s fourth largest trade partner behind the United States, 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 businessmen 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 the prime minister has admitted to be a “very important challenge” (People’s Daily, December 12, 2005). 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 to not 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. In November 2006, Malaysia’s state-owned energy company, Petronas, won a 25-year contract to supply Shanghai with three million tones of LNG per annum in a deal worth $25 billion—by far the largest single trade deal between the two countries (The Straits Times, November 1, 2006). 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-à-vis China. Since 2000, Malaysia has relaxed visa restrictions for Chinese nationals, resulting in increasing numbers of tourist arrivals. In 2006, 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 PRC nationals were enrolled in Malaysian courses, representing 25 percent of all foreign students and the largest single group of foreign students (Bernama, May 26, 2004). 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 Falun Gong. Malaysia has banned its government ministers from visiting Taiwan, and in July 2005, the government prevented the distribution of an allegedly pro-Falun Gong newspaper at the request of the Chinese Embassy (Jakarta Post, July 1, 2005). 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 percent of China’s energy imports transit. As noted elsewhere, Chinese security planners view the SOM 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” (China Brief, April 12, 2006). 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 SOM. China would not like to see a greater security role for the United States, Japan or India in the Malaccan Strait, and it quietly applauded Malaysia’s stance. In a gesture of support, the PRC offered to help Malaysia enhance security in the Strait by providing intelligence and information exchange (People’s Daily, December 16, 2005). Malaysia may also play a role in helping China mitigate its “Malacca dilemma.” In April 2007, it was announced that Kuala Lumpur had given the green light to a private consortium to build an oil pipeline through Malaysia’s northern states, a project that would enable oil tankers to bypass the more congested southern stretches of the Strait [2]. While China has not yet formally expressed an interest in investing in the project, it is likely to do so in an effort to assuage its concerns over oil-supply security.

Prime Minster Abdullah has continued to affirm that Malaysia does not see China as a threat, while Najib has gone so far as to call the PRC an “ally” of ASEAN (Bernama, January 27; The Straits Times, July 23, 2004). In public at least, the Malaysian government has maintained a relaxed attitude toward the modernization of the Chinese military. In April 2007, for instance, Malaysia’s defense minister told parliament that China’s naval build-up should not be taken as an indication that China has expansionist designs in Asia (Bernama, April 24). Malaysian officials and analysts tend to agree with the assessment that the PRC does not have hegemonic ambitions, though it is worth noting that it has become politically incorrect in Malaysia to characterize the PRC as anything other than a benign power, and observers who harbor concerns regarding China’s long-term intentions have tended to withdraw from the debate [3]. Malaysian views on the potentially negative security implications of China’s rising power tend to focus on the possibility of domestic instability in China, the fallout from a China-Taiwan conflict (especially one involving the United States) and Great Power competition between China and the United States on the one hand, and China and Japan on the other. The issue of domestic instability in China strikes a particular chord with Malaysian security analysts because of the potential outflow of Chinese refugees into Southeast Asia, a scenario that could upset Malaysia’s delicate racial balance (roughly 30 percent of the Malaysian population is ethnically Han Chinese). On Taiwan, the consensus is that an aggressive move by China would be highly detrimental to Malaysia’s positive perceptions of China, but that if Taipei “provoked” Beijing by pushing the independence envelope too far, Malaysians would “understand.”

The one outstanding security problem Malaysia has with China is in regards to the disputed Spratly Islands. In 1980, Malaysia laid claim to 12 of the islets in the archipelago and has occupied five since then. During the 1980s, Malaysia’s defense policy prioritized the acquisition of modern air and naval assets, in part to help defend the country’s territorial claims in the Spratlys. While, at present, Malaysia remains vigilant in the South China Sea, it has ruled out the possibility of a conflict in the area. Malaysia and China have never had a major spat over the Spratlys, and it is unlikely that Beijing would directly challenge Kuala Lumpur’s claims for fear of damaging strong political ties. In any case, Malaysia’s territorial claims are geographically far removed from China, and the Malaysian Armed Forces are in a strong enough position to defend the claims (especially given that China lacks air cover in the area).

Malaysia and the PRC are working to improve defense ties. In September 2005, the two countries signed a Memorandum of Understanding on Defense Cooperation, which provides for activities such as military training, exchange of personnel and regular dialogue. A number of Malaysian military officers have attended military academies in China, and vice versa. China has offered to sell weapon systems, including naval ships, to Malaysia, but Kuala Lumpur has politely refused these offers, preferring instead to source its major arms purchases from traditional suppliers in the United States, Britain and Russia, where the quality of weapons systems is far superior to those made in China [4]. In 2004, Malaysia agreed in principle to purchase medium-range surface-to-air missiles from China, for which China in return would supply Malaysia with the technology to produce short-range shoulder-launched missiles (Bernama, July 20, 2004). As of July 2007, however, the Malaysian side has evidenced little interest in materializing the agreement due to budgetary priorities and because other producers such as Russia have offered more attractive pricing and technology transfer arrangements [5].

Abdullah’s predecessor did not subscribe publicly to balance of power theories and feigned ambivalence over the U.S. military presence in Asia. In spite of this rhetoric, however, his government actively facilitated that presence. In 1994, Malaysia and the United States concluded a Cross Servicing and Acquisitions Agreement, which allowed U.S. Navy ships and aircraft to undergo maintenance and resupply in Malaysia. The agreement remained secret until 2005, when the Abdullah government renewed it for ten more years (ABC Radio Australia News, May 9, 2005). Overall, Malaysia’s military-to-military ties with the United States far outweigh anything it has with China: U.S. naval ships regularly visit Malaysian ports each year; the Malaysian and US navies hold annual joint exercises; U.S. Army and Navy Seals hold joint training exercises with their Malaysian counterparts; and U.S. military personnel undertake jungle warfare training in Malaysia (The Straits Times, May 3, 2002). Malaysia’s defense links with the United States—and also with Britain, Australia and New Zealand through the Five Power Defense Arrangements (FPDA)—strongly suggest that Kuala Lumpur wants to help preserve a balance of power in the region against the backdrop of a rising China.

Sino-Malaysian relations are at an all-time high, and the absence of major problems is likely to ensure that the relationship remains cordial for the foreseeable future. In keeping with its prudent hedging strategy, however, Malaysia will continue to facilitate a U.S. military presence in Asia and remain vigilant in the disputed Spratly Islands.

Notes

1. Direction of Trade Statistics Yearbook (Washington D.C.: International Monetary Fund, 2006).

2. Ian Storey, “New energy projects help China reduce its ‘Malacca Dilemma’”, Opinion Asia, May 14, 2007. Available online at: http://www.opinionasia.org/NewEnergyProjectshelpChinareduceitsMalaccaDilemma.

3. Author’s interviews with Malaysian government officials and academics, Kuala Lumpur, August 2005 and September 2006.

4. Author’s interview with Malaysian strategic analyst, August 2005.

5. Author’s correspondence by e-mail with Malaysian defense analyst Dzirhan Mahadzir, June 18, 2007.