Where does Malaysia’s renegotiated ECRL deal leave China and its Belt and Road Initiative?

Photo Credit: Bottlenocker/Wikimedia Commons

Work can resume on the East Coast Rail Project now Malaysia has renegotiated terms with China. What does it mean for Malaysia, China and its Belt and Road Initiative?

By John Pennington

Malaysian President Mohamed Mahathir was quick to postpone work on the East Coast Rail Link (ECRL) when he took office. He was unhappy with the vast amount of money his predecessor, Najib Razak, had committed the country to borrowing.

Now, the deal has been renegotiated. Malaysia will avoid paying the RM21.78 billion (US$5.3 billion) termination fee. The first two phases of the railway will now cost RM44 billion (US$10.7 billion), down from RM65 billion (US$15.8 billion).

Why did China yield?

Critics of the deal pointed out at the time of initial negotiations that China would benefit far more from the railway than Malaysia. Much has changed in the intervening two years. China’s economy has slowed. It is in the midst of a trade war with the US. It has also received criticism for its handling of BRI projects elsewhere.

“Since the summer, China has been rethinking Belt and Road, both the size and the speed at which capital is being deployed and the overall aggressiveness with which they were pursuing these projects,” explained Andrew Polk, a founder of Trivium, a consulting firm in Beijing.

The renegotiation with Malaysia is an acknowledgement that the original deal did not have both parties’ best interests at heart.

BRI’s popularity in Southeast Asia is declining

Mahathir does not oppose BRI in principle. He supports the new rail link and China’s infrastructure development plans in the region but was unable to accept the deal – and shelved a gas pipeline deal – in its original form.

Nevertheless, BRI is not as popular as it once was. A recent ISEAS-Yusof Ishak Institute survey revealed that one-third of Southeast Asian respondents felt the initiative lacked transparency. Nearly 70% of respondents urged their governments to exercise caution when negotiating with China. In Thailand, a similar plan was delayed as engineers protested against Chinese involvement.

Another reason China is reevaluating its handling of BRI is that it now faces competition. Japan and the US are offering countries in the region lucrative infrastructure and security investment opportunities. This competition has forced Beijing to respond. With other options on the table, China’s deals are coming under increased scrutiny.

Beijing now fears other countries will consider renegotiation

Beijing fears that other countries in Southeast Asia will now try to pursue similar renegotiations. Although, this has not materialised yet.

Reopening negotiations with Beijing would involve a government admitting that they did not secure the best deal available during the first round of negotiations. It is no coincidence that Malaysia, the Maldives and Sri Lanka all had new governments in office before they reopened contract negotiations.

Therefore, Beijing is keeping a close eye on Indonesia’s elections – one of the biggest benefactors of BRI. Prabowo Subianto has already claimed he will consider following Mahathir’s example and look to renegotiate his country’s BRI commitments should he beat incumbent President Joko Widodo.

Source: Oxford Economics via London School of Economics

China must also be wary of cutting costs across the board. One unfavourable deal does not mean every other deal is weighted heavily in Beijing’s favour. It can point to success stories elsewhere, particularly in Africa, where loans and partnerships have enabled significant economic growth in cooperating nations.

China may step up its efforts in other regions

While China is facing resistance in Asia, it is strengthening interest in cooperating with other nations. It has already made moves towards Europe and Italy recently became the latest country to join. China has signed MOUs with several other EU countries.

In late April, China will hold its second BRI summit. It will attempt to convince those attending – and high-profile absentees, such as the US – that the project is transparent, is not burdening other countries with debt and not being used as a tool to build geopolitical influence.

And while the US remains a vocal critic of BRI, others are taking a closer interest. The EU, despite considering building an alternative, wants to engage. In return, it would require access to Chinese markets.

Mahathir’s renegotiation is good for Malaysia and could reflect well on China

Mahathir’s renegotiation of the ECRL is, despite shortening the length of the railway, a good deal for Malaysia. Under the original terms, the country was committed to overarching loan repayments. Mahathir claimed it would take Malaysia 30 years to cover the final cost of around RM140 billion (US$33.5 billion).

The new deal – full details of which have not been announced – should work better for both parties.

China must prepare itself for new governments replacing established regimes and pushing for similar, or perhaps more aggressive renegotiations. This could be the start of a more transparent and less aggressive approach from Beijing.

The timing of this deal is also important. China wants as much good press as it can muster ahead of its summit later this month. If it can prove to potential suitors that it is prepared to listen, renegotiate and right some wrongs, it can start repairing some of the damage the more negative aspects of BRI has done to its reputation.