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Trump effect on China deals

by December 17, 2016 General

WHILE United States president-elect Donald Trump takes on a more protectionist slant in his economic policies, there is no doubt that in this part of the world, the global village is getting smaller and who holds the position of the village head is obvious.

With numbers on its side at every level and sphere, China has the prerequisites. At the end of the day, it boils down to money.

So, when news filtered out in late November, about 20 days after Trump’s presidential victory, the Western media picked up that chunk of news with glee. Over in this part of the world, the media response was more muted.

The latest restrictions to stamp the spike in the outflow and shore up the strength of the yuan include outbound investments of more than US$10bil, or mergers and acquisitions above US$1bil if these are outside the Chinese investors’ core business, and foreign real estate deals by state-owned enterprises or SOEs involving more than US$1bil.

A UOBKayHian research report says China’s potential curbs “are unlikely to negatively impact the property developers” under their coverage.

The report was not specifically about the impact of the curbs on Chinese investments. It, however, alluded to it and has taken note that “the major alliances of the large deals are mostly government-related”.

“We believe that the chances of these investments being withdrawn are low, given Malaysia’s key strategic position in China’s One Belt, One Road initiative,” the report by Ridhwan Effendy says.

The Belt and Road initiative is an economic initiative that connects China and Asia with the European continent, the Middle East, South Asia and the African continent.

It is uncertain at this point how these restrictions would impact the Chinese investments in Malaysia. According to the UOBKayHian report, the investments thus far are largely at the government-to-government level.

Secondly, most of these investments form the parts that will eventually make up the Belt and Road initiative, which involves both land and maritime links.

Hence, it is unlikely to be withdrawn, says UOBKayHian’s Ridhwan.

Economist Lee Heng Guie from the Socio-Economic Research Centre says although the curbs are significant in light of earlier curbs, the latest round may not be retrospective.

“We do not know yet if these curbs apply to previously committed investments. It may just apply to new ones,” he says.

Lee says the Chinese investments in Malaysia were agreed upon earlier. If the curbs are retrospective, they can be very disruptive.

Economic and financial policy changes would be relevant to Malaysia. Chinese interest in Malaysia is not new but has grown the last several years, having started at private-sector levels and with certain individuals.

Over the years, these deals have taken on a public-sector whiff.

More tellingly, a couple of months ago, the Malaysian government announced with much fanfare deals worth a total of RM143bil with China.

Although some of these investments are at the memorandum of understanding stage, there is a definitive quality about some of them. Some of them will have a long gestation period. Moreover, Malaysia needs the investments.

Real estate deals

The UOBKayHian report identified several major real estate deals that have investment values of more than US$1bil.

These include the following:

> Guangzhou R&F Properties Co Ltd’s 116-acre Princess Cove development, which fronts the Johor Straits, with 15 blocks comprising more than 3,000 residential units in phase one. The project has four phases.

> Country Garden Holdings Co’s Forest City development off the coast of Malaysia’s southern state of Johor, which comprises several man-made islands on reclaimed land on the Straits of Johor.

> Greenland Holdings Corp’s 128-acre land purchase in Tebrau Bay, also in Iskandar Malaysia.

> China Railway Engineering Corp’s stake in the Bandar Malaysia purchase in the Klang Valley.

> The Malacca Gateway development in the state of Malacca.

The report says while the land cost of these projects is valued at less than US$1bil each, except for Princess Cove and the Malacca Gateway, additional capital requirements to develop these projects would most likely cause total investments to rise above the threshold.

Impact on local developers

As for the Chinese curbs’ indirect impact on local developers, the UOBKayHian report says they would have “a net positive impact, as there would be less competition, which would benefit Malaysian developers”.

Nonetheless, the report says “the likelihood of the investments being pulled out is low, given that most of the projects fall below the maximum threshold and have already started construction”.

Also, the Chinese government has made it clear that overseas investments which are in line with China’s national strategic interests – including the One Belt One Road initiative – will be supported.

Large-scale projects in Malaysia linked to the Belt and Road initiative include the following:

> The East Coast Rail Line which is worth RM55bil;

> The Gemas-Johor double track worth RM9bil, and

> The Kuantan Port expansion with an investment value of RM4bil.

The last several years have seen a slew of Chinese investments flowing into Malaysia. The trickle of interest started in the southern state of Johor, specifically Iskandar Malaysia, particularly property developments which over the years have spread to other parts of the country in and around Kuala Lumpur.

Chinese interest includes power assets, high-speed rail and large-scale mixed developments which run into hundreds of acres in Kuala Lumpur.

As for Iskandar Malaysia, specifically, the avalanche of Chinese money has replaced the Middle-Eastern interest which had helped to publicise Iskandar Malaysia on the global market, then known as the Iskandar Development Region. But the 2009 Dubai debt debacle and subsequent political and economic issues in the Middle East resulted in the drying up of Middle-Eastern interest in the southern economic region.

Today, Chinese money and developments dominate Iskandar Malaysia, three times the size of Singapore. Property developments make up 56% of investment value there, totalling RM122.06bil out of a cumulative RM221.02bil received to date since 2006 when the region was launched.