Malaysia's state investment fund 1MDB is preparing to make a repayment with Chinese assistance to Abu Dhabi's state-owned fund as it seeks to settle a US$6.5 billion (S$9.25 billion) dispute over an alleged breach of contract, the Financial Times reported on Wednesday (Dec 7).

The report followed one by The Straits Times in July that said Chinese companies were looking at buying a piece of 1MDB-owned prime land in Penang as a financial lifeline for 1MDB.

The move to begin repaying what 1MDB owes Abu Dhabi’s International Petroleum Investment Company (IPIC) was confirmed by two people familiar with the matter, FT said, and marks a step forward in efforts to resolve the financial position of the heavily indebted state fund.

China has been approached as a source of funds for 1MDB, FT said, citing three people with knowledge of the matter, one of whom said Malaysia would swap assets for financing.

It is not clear if the assets mentioned in the FT report consist of the Penang land.

The dispute between 1MDB and IPIC is part of a financial scandal engulfing Malaysian Prime Minister Najib Razak, who is increasing tilting towards China to help resolve the huge financial burden at 1MDB, which carried debts of more than US$12 billion at one point.

The spat arose from a bailout deal last year in which IPIC agreed to lend US$1 billion to 1MDB and assume payments on US$3.5 billion of the Malaysian fund’s debt in a debt asset swap deal. It also forgave some debt that 1MDB owed IPIC.

But the Emirati firm claimed in April that 1MDB had not repaid the US$1 billion advance and applied for arbitration in London, where it is publicly listed.

The Straits Times said in July Chinese companies were looking at buying a piece of prime land on Penang island for about RM2 billion, or entering into a joint development deal with 1MDB that would guarantee profits of about RM3.5 billion.

China’s state-owned entities were also exploring the prospect of putting together a financial lifeline for another distressed Malaysian state-owned entity, SRC International, ST reported, citing financial executives involved in the negotiations..

Malaysia last year twice brought in Chinese investments to pare back 1MDB’s debts.

In response to the FT report, 1MDB president Arul Kanda told The Straits Times: "1MDB has nothing further to add to earlier statements relating to the dispute with IPIC."

On the Penang land deal Mr Kanda said 1MDB would issue a statement at an "appropriate juncture".

Malaysia's second finance minister Datuk Johari Abdul Ghani, whose ministry owns 1MDB and provided indemnity on the deal with IPIC, referred queries to 1MDB. "We're basically leaving it to 1MDB to sort out at a business-to-business level," he told The Straits Times.

Mr Najib has been forging increasingly close ties with Beijing. Last month, he dismissed as “absurd and absolutely false” allegations that he has pawned off Malaysia’s sovereignty after making deals worth RM144 billion (S$46 billion) with China during a visit to Beijing.

Chinese state-owned enterprises have led a bailout of 1MDB - acquiring assets including a power generation business — that has relieved pressure on Mr Najib's government at a time when financial flows linked to the state fund are being probed by regulators in the US, Singapore and Switzerland.