Greening China's Belt and Road Initiative in Malaysia: Rhetoric versus Reality.

• Date: 01 April 2024
• Author: Yean, Tham Siew

1. Introduction

China launched the Belt and Road Initiative (BRI) in 2013 as a platform for global and regional cooperation. Although it is closely and frequently associated with infrastructure development, the platform also includes cooperation in trade, finance, policy coordination, and people-to-people exchanges. However, over time, the implementation of large-scale infrastructure developments under the auspices of the BRI, especially in developing countries, has raised concerns over their negative environmental impact. For example, Teece (2018) discusses the ecological damage incurred by BRI hydropower projects that traverse through ecologically sensitive areas. Consequently, China announced a shift towards green infrastructure, green investment, and green financing at the 2019 Second Belt and Road Forum for International Cooperation (Pike 2019).

Although what constitutes a green BRI is not clearly defined, it is taken to imply that BRI projects will be aligned with the UN's Sustainable Development Goals (SDGs). These broad policy goals are supported by evolving guidelines that seek to promote operational rules based on dialogue, which are grounded on China's experiences as well as international standards and experiences (Sun and Yu 2023). The guidelines seek to encourage Chinese companies operating overseas to observe local environmental laws while urging them to adopt higher environmental standards. Therefore, local laws, when implemented judiciously, can make a difference in the actual implementation of green BRI in a country.

The paper first identifies the pattern of Chinese investments in Malaysia before delving into the changes since the Second BRI Forum in 2019. In particular, it will seek to explore whether there has been a distinct shift towards the new green-aspired goals of the BRI in terms of green governance and green projects. The article is organized as follows. After this introduction, an overview of the pattern of Chinese investments is provided in the next section. The third section examines green governance in the country. Major changes after the BRI Forum in 2019 are discussed in the subsequent section. The final section concludes and summarizes the key findings of the paper.

2. Overview of the Pattern of Chinese Investments in Malaysia

Seneviratne and Sun (2013) found Malaysia's infrastructure development to be relatively better than that of its ASEAN-4 peers, namely, Indonesia, the Philippines, Thailand, and Vietnam. Hence, tapping the BRI for infrastructure development in Malaysia is less crucial than in the other ASEAN-4 member countries. Furthermore, the Economist (2019) has noted that China is also keen to expand its footprint in overseas production and commercial activities. Therefore, this paper considers a broader definition of the BRI--one that encompasses China's outward investments in all sectors rather than in infrastructure alone.

As noted in Tham (2023), Chinese investments in Malaysia became prominent after the announcement of the BRI in 2013. Specifically, these investments increased sharply from 2015-16 before tapering down after 2019, due to the negative impact of the lockdowns in China and Malaysia following the spread of the COVID-19 pandemic (Figure 1). Although total inflows of FDI recovered in 2021 in tandem with the global recovery from the pandemic in that year, China's inflows remained muted due to its "zero-COVID" measures. As China delayed the opening of its economy till the end of 2022, its inflows to Malaysia managed to inch back only in 2022 and 2023. However, the volume remained lower than the peak value attained in 2016-17. Indeed, the share of China in Malaysia's total FDI was 12.6 per cent and 17 per cent, respectively, in 2016 and 2017; thereafter its share dropped to 4.9 per cent in 2022 due to the rebound in FDI from other countries in 2021 and 2022.

Chinese investments in Malaysia are spread over many sectors and throughout the country, in the Peninsula and Sarawak and Sabah in East Malaysia. These investments are heterogeneous in nature with different ownership structures, links with the government, be it at the federal or state level, as well as various sources of finance. Due to the heterogeneity and lack of detailed secondary data for all the Chinese investments by subsectors, the profile in this section can only highlight some of the notable projects in the different subsectors. Overall, as in the rest of ASEAN, Chinese investments in the services sector figured prominently, especially in 2016-17 (Figure 2).

Within services, significant investments include real estate projects such as the Forest City project in Johor in 2015 (GlobeNewswire 2022) and in education, with the entry of the only branch campus of Xiamen University outside China. Xiamen University in Malaysia (XUM) was established in 2015 with the first batch of pioneering students admitted in February 2016 (Xiamen University n.d.). It was built at a cost of US$27 million (Jie 2018) and is funded through loans from Chinese lenders, with the support of the Chinese government since the mother campus is a public university, as well as some private donations.

China's interest in real estate in ASEAN, including Malaysia, has been partly motivated by the foreign investment curbs to cool down property prices in the property market of developed countries such as New Zealand, Australia, Canada, and the United Kingdom (UK). Malaysia My Second Home (MM2H) initiative also attracted Chinese investors; Chinese citizens accounted for 30 per cent of MM2H's applications approved between 2012 and 2018. Forest City is specifically designed to tap into Chinese interests in the real estate sector. It is envisaged as a US$100 billion joint venture between Hong Kong-listed but Guangdong-based Country Garden and a local company that is partially owned by the Sultan of Johor, Esplanade Danga 88 Sdn Bhd (Ourbis and Shaw 2017).

The Digital Free Trade Zone (DFTZ) constitutes another significant Chinese investment. It focuses on logistics services and was conceived when Jack Ma was made adviser to the government in 2016 for the development of e-commerce in the country. It was set up as a special zone dedicated to developing a range of services that cater to the needs of e-commerce. In 2017, a joint venture was established between Malaysia Airport Holdings Bhd (MAHB) (30 per cent) and Cainiao Network, the logistics arm of Alibaba, to invest around RM800 million for the development of an e-fulfilment hub at the DFTZ (Gomez et al. 2020). Additionally, in November 2020, MAHB announced the commencement of the new fulfilment hub, Cainiao Aeropolis eWTP Hub Malaysia (formerly known as KLIA Aeropolis DFTZ Park) (MAHB 2020). The hub spans 60 acres with 1.1 million square feet of warehouse space and is expected to double KLIA's cargo volume to 1.4 million per year by 2029. It is also expected to facilitate 24-hour delivery within Malaysia for e-commerce operators and create a 72-hour delivery time frame for the rest of the world.

In manufacturing, China's FDI increased after BRI's announcement in 2013. In fact, China was the largest investor in the manufacturing sector (in terms of approved projects) for the five consecutive years from 2016 to 2020. The sudden jump in approved investments in 2021, especially from other countries, led to a smaller share of Chinese investments in manufacturing; China emerged as Malaysia's fourth-largest investor that year. During this time, diverse manufacturing projects--ranging from the production of stainless steel, cars, and batteries to tyre production--were approved. Importantly, since Malaysia has a relatively small domestic market, the approved investments have an export component (Figure 3).

Of particular importance are the solar investments from China, since solar energy is deemed to be a sustainable renewable form of energy and therefore part of green investments. But this green investment initiative predates the BRI. It is instead rooted in Malaysia's plans to expand solar manufacturing in the country as local policymakers have long aspired to develop an entire solar industry ecosystem in the country--from research and development (R&D), design, to the production of metal silicon, polysilicon/ingots and solar wafer/cells, solar modules--since the Eighth Malaysia Plan (2001-5) (Government of Malaysia et al. 2011). Therefore, the Malaysian Investment Development Authority (MIDA) has been targeting FDI for the development of the solar ecosystem, using both fiscal incentives (such as tax holidays, investment tax allowances, reinvestment allowances, import duty exemptions) and non-fiscal incentives (such as a feed-in tariff scheme and a green technology funding scheme). Malaysia's relatively low electricity and labour costs have added to the locational advantages of this type of investment.

In 2008, Malaysia received RM12 billion in photovoltaic (PV) industries. Four well-known solar companies, First Solar, Q-Cells, Sunpower, and Tokuyama (from the US, Taiwan, Germany, and Japan) invested in Malaysia, making it the fourth-largest producer of PV cells after China, Germany, and Japan that year. By 2009, thanks to FDI inflows, Malaysia reached the third spot, overtaking Japan in just one year. All these developments predate the BRI.

Externally, in 2014, the US raised tariffs on crystalline solar products imported from China by up to 165 per cent. The imposition of these duties instigated the relocation of Chinese manufacturers to other countries such as Malaysia, Korea, and Taiwan to circumvent the tariffs and reduce costs by seeking out the lowest-cost markets.

These push and pull factors led to the relocation of solar investments out of China into Southeast Asia, including Malaysia. Penang, in particular, benefited...