Wary of a debt trap, Malaysia’s government has backed out of three China-funded infrastructure projects

• Malaysia’s Prime Minister Mathahir Mohamad has decided to shelve $22 billion worth of China-backed projects, citing their infeasibility.
  
• The projects, which are part of China’s Belt and Road Initiative, were greenlit in 2016 by Najib Razak, Mohamad’s predecessor who is at the centre of a money-laundering scandal linked to the country’s investment fund.
  
• Mohamad’s decision comes as a number of countries in Asia have taken on a unsustainable amount of Chinese debt for projects of strategic importance to China.

Following the conclusion of his trip to China, Malaysia’s new Prime Minister, Mahathir Mohamad, made one thing clear: debt reduction is the need of the hour for the Southeast Asian country. On August 21st, Mohamad told media outlets that he would not be able to go ahead with $22 billion worth of China-funded infrastructure projects for the time being because his government simply couldn’t afford it.

The projects, which are part of China’s Belt and Road Initiative, were greenlit in 2016 by Najib Razak, Malaysia’s embattled former Prime Minister who lost the election to Mohamad in May 2018. They involve the construction of a railway line, the East Coast Rail Link - which was estimated to cost $20 billion, and two energy pipelines. Mohammad also cited the high valuations and unreasonable terms of the project contracts as part of his rationale for pulling out.

Malaysia’s national debt is estimated to total around $250 billion. Razak, who is at the center of a huge money laundering scandal linked to the country’s sovereign wealth fund, was routinely criticised for greenlighting expensive projects funded by China’s state-owned companies in return for “sweeteners” that helped him pay down debts related to the fraud.

The China debt trap

Mohamad’s decision comes as a number of countries in Asia have taken on a unsustainable amount of Chinese debt for projects of strategic importance to China. The trend has sparked fears that China is using its Belt and Road Initiative to gain influence over smaller countries.

At the end of last year, Sri Lanka had no choice but to hand over a 99-year lease for control of its Hambantota port, which is just a 100 miles from the Indian coast, to China after it was unable to pay back a loan. The transaction has gained prominence as a cautionary tale for other countries that are getting into bed with China. In December 2017, Pakistan withdrew a request to China for the funding off a $14-billion dam project owing to “unacceptable conditions”, opting instead to finance the project itself.

A difficult exit

One of the goals of the Malaysian Prime Minister’s five-day trip to China was to stimulate Chinese investment. He did, however, make a clear stand that his government would not take on huge debts for projects unless they were completely necessary.

Mohamad did add that the country could revive the aforementioned projects in the future should they become viable, although this was likely a diplomatic measure. His government will likely have to pay a substantial fee to exit the projects so in order to delay the payment they could just stall their exit. The first order of business though, is to recoup the funds that have already been spent on the projects.

While this could lead to some commercial disputes, it seems that Mohamad has taken the right stand. After all, he was elected on a platform that involved the reduction of the country’s debt. It’s time to make good on his election promises.