Explaining Malaysia to China: The Five Middles

Getting Malaysians and Chinese to understand each other’s economy is crucial for Malaysia’s future. It is important for Malaysians to understand contemporary China while China’s policy makers and business community have a clear idea about Malaysia’s unique role.

The size of the Chinese economy is extremely large and each of its intended and unintended actions has massive impacts and consequences on the world economy, Malaysia included. The Chinese economy was at US$17.96 trillion in 2022. For comparison, the United States economy stood at US$25.43 trillion; Germany, US$4.08 trillion; Japan US$4.25 trillion; South Korea US$1.67 trillion; Malaysia US$407 billion. (https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=MY) If the Chinese economy were to grow by 5%, the expanded portion of a particular year alone is the size of two Malaysian economies. 

The Chinese economy is so large that Malaysia didn’t really feature in the minds of the Chinese if not for the current US-China geopolitical and geoeconomic competition.

Paramount leader Deng Xiaoping launched the economic “reform and opening” in 1978. After the setback as a consequence of the Tiananmen crackdowns in 1989, he pulled the nation back on track of economic growth through his last major act, the Southern Tour, in 1992.

China continued to grow rapidly from 1992 until the emergence of the Covid-19 pandemic in 2020. The economy boomed especially since China’s ascension into the World Trade Organisation in 2001. A whole generation of Chinese knew only that the next year would be better than this year, and they had faith that the next generation would certainly live a much better life than theirs.

The Chinese economy has been essentially driven by four engines, namely, export, real estate, high tech and domestic consumption. The headwinds China faces now are not cyclical as three of the four engines are under severe stress.

China’s dilemma

Exports faced the stranglehold of the United States and her allies since Donald Trump’s presidency in 2017 and has further deepened in recent years. The real estate bubble is finally arriving, which has implications for steel, cement, construction materials, and, of course, the banking sector. Property at one time constituted more than 30% of GDP.

China’s high tech sector is partly driven by the national security imperative to compete with the United States, and partly by the sheer capacity to innovate. Yet, high tech such as automation and artificial intelligence (AI) does replace some jobs, without corresponding increase of new jobs that are not easily replaceable by machines or machine learning. Nonetheless some replacement of jobs by technology should be welcome given China’s shrinking birth rate and a rapidly aging population. 

Since the end of Covid-19 lockdowns, domestic consumption has not expanded as much as expected as jobs and the prospects of future income were affected by the decline of exports and the slow bursting of the real estate bubble. The wealth of the urban middle class is mostly tied to the properties they owned. As property values stagnant or decline, it affects household wealth, confidence, and hence domestic consumption.

Insufficient care service jobs have been created. This can be attributed to China’s negative views of welfare. With many worried about how to pay for ageing or illness as there is hardly any provision of aged care or health insurance or funding, the insecurity regarding the future means more ordinary Chinese hoard cash for rainy days, instead of spending for today.

Essentially, although China’s economy is huge, is still growing despite a slower growth rate, and has massive productive capacity, it has a less than robust domestic market which is facing difficulty in fulfilling what the other engines were supposed to fire up. Chinese businesses are now in a wave of expansion into foreign economies in search of new markets.

Malaysia and her Southeast Asian neighbours are now the talk of the town among Chinese businesses as they find ways to deal with the current challenges they face in China.

The five middles

In my many encounters with businesses from China, I have been suggesting to them to see Malaysia in the following “middles”:

First, Malaysia occupies the indispensable “middle” in the global supply chain in which the manufacturing sector has the technical know how and capacity to produce many products. This is especially true in the electronic and electrical sub-sector.

Second, in an increasingly bifurcated world, Malaysia’s non-aligned geopolitical positioning provides a middle ground for businesses from China and the West to trade and to exchange. 

Third, Malaysia aspires to become a middle class society, emulating China’s success. China had about 100 million middle class in 2001 and now has 400 million people living a middle class life.

Fourth, Malaysia takes a moderate middle-of-the-road approach towards ethnicity and religions, which is important in an increasingly polarised world.  

Fifth, Malaysia’s strategic geographical location right in between the Indian Ocean and Pacific Ocean is also highly relevant especially in the context of trade and geopolitical competition.

The five “middles” are the value propositions of Malaysia which should be explained to the Chinese business community.

Malaysia as an ideal business destination

Malaysia is an ideal destination for Chinese businesses to set up shop as regional headquarters, regional or global distribution centres, and location for high-end manufacturing.

Malaysia’s multilingual and multicultural educated workforce, English Common Law framework, strong logistics network and infrastructure, makes Malaysia a near-peer to what Singapore could offer. 

For deeper collaboration, Malaysia and China should deepen interoperability of stock exchanges, arbitration services, trading in respective currencies, and many other new architectures that would facilitate trade and services, especially the operations of regional headquarters in Kuala Lumpur and Johor Bahru.

As Malaysia has these unique attributes, we must not sell ourselves short. I often tell Malaysians who are involved in attracting China’s investments that they have a duty to share with their investors that Malaysia aspires to equal the high quality development that China is promoting now.

The recent “Two Sessions” in March, the most important meetings on the Chinese government’s calendar, have promoted the “new quality productive forces” to pursue high-quality development, with the aim of further accelerating China’s economic output.

Durable mutual collaborations

China’s investment into Malaysia should be paying the same wage level as China (which is in general higher than Malaysia now). According to a HSBC Global Research study, Malaysia’s wage cost as a share of China was 120% in 2009 and only at 70% in 2022. Low wage is not a badge of honour for Malaysia. Raising wages is a key goal for Malaysia to move forward, which could be helped by new investments into higher value-added sectors. 

The environmental standards of Chinese investments into Malaysia should be at par with what China is requiring firms to adhere to (in recent years, China has very stringent environmental regulations and higher standards of emission restriction than Malaysia). One of the reasons why there was imported garbage into Malaysia was because China refused to handle garbage sent from Western nations anymore while some unscrupulous Malaysians collaborated with Chinese businesses to transfer them to Malaysia.

Malaysia must also be very concerned about the overcapacity of some industries, such as the steel industry, so as not to replicate China’s overcapacity in Southeast Asia. I am particularly worried about the potential doubling of steel production capacity in the region between 2021 (75.3 million tones) and 2026 (147.2 million tones), according to South East Asia Iron and Steel Institute. Many of these Chinese-owned steel mills used to export back to China to supply the construction sector which is now much smaller than a few years ago.

For long-term sustainable collaboration, the Malaysian government would need to encourage and handhold Chinese firms which invest in Malaysia to build a Malaysian supply chain. There are misguided beliefs among some Malaysians and Chinese that they could rebadge or repackage China’s products or bring the entire China’s supply chain to Southeast Asia in the hope to avoid the high tariffs the American and European governments imposed on China’s products. This is not wise and not going to last long, and should be avoided from the onset. Malaysia’s favourable trade agreements with partners is a great asset that should be treasured and maintained, hence building a long-lasting Malaysian supply chain is the way to go.

In addition, the competition between the US and China is concerned more with technology. In this area there could potentially be a vacuum in the ownership and sovereignty of intellectual property in certain key technologies. Malaysia could step in to fill in part of this void should it make a big push to strengthen its R&D efforts as well IP laws.

The world is changing rapidly, China is huge and a factor that is highly consequential to the Malaysian economy in the years if not decades to come. Malaysia needs to play to its strengths and to bring the value propositions to the fore, to create durable collaboration for the benefits of our two countries and two peoples.

Happy 50th Anniversary to Malaysia-China Diplomatic Relationship!

The piece was first published in The Edge’s pullout on the 50th anniversary of Malaysia-China diplomatic relationship.

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