For Chinese companies, migrating production capacity overseas and re-exporting finished goods has become an effective tool to offset the adverse impact of US import tariffs amid escalating Sino-US trade tensions. Since April, Asean export growth to the USA has accelerated, as has China’s to Southeast Asia due to lower costs, favourable tax policies and stable political environments. This regional reshaping of the supply chain cannot be ignored as firms increasingly head south. In the first of a joint CLSA/CITICS series, we explore China’s strengthening ties with Malaysia.
Malaysia has emerged as a favourite destination for Chinese firms looking to relocate their manufacturing bases. Cooperation between the two countries has strengthened meaningfully since the establishment of two industrial estates in 2012 – Two Countries and Twin Parks – which were built to enhance regional supply-chain management and optimise trade flows and investment. More recently, we have seen Beijing’s Belt and Road Initiative, an infrastructure programme that seeks to expand its economic footprint, and increase cooperation and connectivity.
China’s Malaysian footprint
Chinese businesses in Malaysia are keenly entrenched, especially in property development, auto manufacturing plants, ecommerce and construction. In the past, mainland investment was dictated by policies and implemented by SOEs. This is bearing fruit with the now-operational Alliance Steel supplying products to the region, and the East Coast Rail Link (ECRL), an infrastructure project that marks the revival of a positive relationship between the two nations after things became strained following Malaysia’s 14th General Election in May 2018.
Malaysia’s regional-hub ambitions
Malaysia’s advantages in attracting investment are manifold. It offers a strategic port location, well-developed infrastructure and an established legal system, tax incentives to foreign firms, and is also deemed to be one of Asean’s more technologically-developed nations. Among the companies we spoke to, time zone, culture, cuisine, and a highly-skilled English/Putonghua-speaking Malaysian population feature as reasons why it is a preferred location for Chinese operations.
Beneficiaries from investing In Malaysia
The Sino-US trade spat is a catalyst for tighter cooperation. PRC manufacturers are investing in Malaysian facilities to gain advantages through reduced production costs and tariffs/duties. Rich palm-oil resources also provide opportunities in value-added downstream activities such as oleochemicals and pharmaceuticals.