Chinese Companies Are Worse at Business Than You Think

The biggest Chinese project in Malaysia has little to do with the Belt and Road Initiative (BRI), Beijing’s official strategy to economically reorder the world. But it’s nevertheless the symbol of a big problem, one that tends to go overlooked by watchers of the Chinese economy. Forest City, a luxury real estate development that aims to house 700,0000 residents in a futuristic green utopia across the border from Singapore, is a case study in how easily Chinese investment projects that are entirely private can become boondoggles due to the interference of Chinese politics and poor Chinese management.

Country Garden, the Chinese megafirm developing Forest City, has suffered from sweeping decisions made by Chinese President Xi Jinping and been taken for a ride by its Malaysian partners, all at the expense of the local community. U.S. policymakers are rightly concerned about BRI’s geopolitical aims, but they should look to Forest City to understand how citizens of middle-income countries suffer whenever local elites and Chinese firms cooperate, even without Beijing’s direct involvement.

Forest City was an overly ambitious project even before matters went awry. Country Garden’s plan hinged on three premises: Malaysia’s real estate affordability relative to Singapore and to China’s first-tier cities, local special economic zone tax incentives, and Malaysia’s adequate transportation infrastructure to move people and goods throughout the peninsula and to Singapore’s commercial hub. However, this proposition also relied on a narrow demographic: upper-middle-class Chinese citizens looking to park wealth abroad. Forest City sought to attract Chinese buyers who could not afford multimillion-dollar apartments in Beijing, Shanghai, or London for that matter but would gladly spend several hundred thousand on a bungalow in the Malaysian state of Johor, especially if it would appreciate in value.

Country Garden pledged to spend $100 billion on Forest City to attract that clientele. The development was also designed to include additional infrastructure, amenities, and islands with commercial and tourism opportunities that would bring additional revenue streams. Forest City’s proposal to buyers was luxury in perpetuity: a luxury golf course today and autonomous cars and solar-powered roads tomorrow.

Forest City does not have much to do with the continent-spanning rails and roads that China promotes under BRI, but Country Garden nonetheless pitched the project under the BRI flag in a bid to gain Beijing’s support. Instead, the Chinese firm became embroiled in the machinery of domestic politics in both China and Malaysia. On one side, Country Garden staff reported strong initial sales from mainland China until Xi ramped up capital controls to combat currency depreciation. Sales subsequently cratered, and Country Garden opened offices in India, South Korea, and the Middle East looking for substitute buyers.

Today, Forest City is still mostly empty, despite the round-the-clock construction. Country Garden staff reported that it had officially signed more than 5,000 units, but one Forest City citizen estimated the number to be around 500 residents. My recent visit made that figure appear optimistic.

On the other hand, even before capital controls, Forest City encountered setbacks. The ruling sultan of Johor struck up the Forest City development as a partnership between Country Garden and a holding company associated with Johor’s public investment arm, in which he retains the lion’s share of assets. In 2013, the sultan sold marine area to Country Garden to reclaim for Forest City. Instead of the usual detailed national- and state-level reviews, Johor’s Environment Department in January 2014 approved full-scale reclamation a few days after Country Garden submitted a preliminary site assessment in direct violation of national- and state-level processes. Local residents and fishermen who were not properly notified saw the coastline change and skyscrapers go up virtually overnight.

The ensuing communal anger took Country Garden by surprise. The Chinese firm had relied on its local partner—a politically linked firm in Johor—to guide Forest City through the appropriate environmental process, which simply did not occur. Country Garden did eventually complete an environmental impact assessment, but the environmental problems remain manifold. Threats to biodiversity have become worse, and corrupt local leaders seem to have captured the fund that Country Garden established to compensate local fishermen for their loss of livelihoods. Meanwhile, Forest City’s costs could rise, and its Chinese customer base stays inaccessible. Country Garden rushed land reclamation in under 90 days. In comparison, Singapore let new lands settle over years before building on them. On top of concerns with existing construction, Country Garden believes it will have to continue to build out additional reclaimed islands to project confidence and attract customers. “We are selling not only apartments but a whole city,” said one employee.

Country Garden made some effort to employ locals in Johor, but large swaths of Forest City’s workforce are low-wage laborers from South Asia or white-collar Chinese workers who were hired to cater to Chinese clientele. Local community groups indicated that Country Garden has been receptive to criticism, but the picture is still grim as the firm attempts to navigate around those who personally gain from the lack of due diligence. One local expert, who declined to be named for fear of political repercussions, lamented: “Everyone is working on the assumption that we’re going to lose everything,” referring to local community activists and fishermen whom Forest City is pushing out.

Nefarious geopolitical intent need not be the only reason to sound the alarm on Chinese investments. Chinese projects come at a high hidden cost: They are easy to exploit for greed and graft. That Beijing compels its firms to adhere to standards no higher than that of host countries, and that Chinese businesses still have little experience in foreign markets—even ones as close as Southeast Asia—explains much of this dilemma.

Simply put, corrupt local elites have taken a Chinese Fortune 500 company for a ride. The Johor government can pocket tax after tax for land and property sales without putting its own money into the project. But Country Garden, itself immense, invested little of its overall global portfolio and would not seriously suffer if Forest City failed. As it stands, corrupt domestic elites and Chinese firms, even when at odds, can build megaprojects without cost-benefit or environmental analyses. Forest City is one example where community members and property buyers lose out, but there are likely more. The rest of the world is not immune to vulnerabilities of Malaysian governance and Chinese mismanagement.