Malaysia rebuttal reflects mistrust of China's 'Belt and Road' plan

Is Malaysia’s repudiation of China’s “unequal treaties” a sign of things to come?

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Malaysia's abrupt cancellation of $3bn worth of China-backed pipeline projects represents probably the biggest knockback so far for President Xi Jinping's Belt and Road initiative. This initiative has been bankrolling large-scale energy projects right across the region.

Work on the pipelines was suspended in July, but the cancellations were announced in early September. They involve two oil and gas pipelines in mainland Malaysia and Borneo, and another linking the state of Malacca to a Petronas facility in Johor. The contracts had been signed under former prime minister Najib Razak, who is facing trial next year over corruption allegations.

The new Malaysian government's show of independence follows prime minister Mahathir Mohamad's promise to review all of the country's "unequal treaties" with China. Many of these involve Belt and Road initiatives, including a $20bn rail link.

China's state-owned oil groups have also suffered setbacks recently. In South Africa, Sinopec lost out to a Glencore-backed bid in the race to acquire Chevron's downstream business, despite being the US company's preferred bidder. The assets, which include a 110,000-barrels-a-day refinery near Cape Town, went for $973m.

That defeat followed another failure by Sinopec in the region. In August 2017, a GE-led consortium pipped the Chinese company to the post for the construction of a 30,000-b/d refinery in western Uganda that will process the country's crude.

Showing nerves

The big question is whether these and other failures to win lucrative contracts suggest growing nervousness about China's sweeping economic ambitions under Belt and Road. Certainly, Sri Lanka's Hambantota Port project has turned into a warning throughout the region. From the very first phase of construction funded by China's Exim Bank with an initial $307m loan at a then exorbitant rate of 6.3%, the project has turned sour.

Instead of attracting hundreds of crude oil tankers and other bulk carriers, as the former government predicted, the port proved to be a financial white elephant. In 2017, the current government was forced to hand 80% of the equity to Hong Kong-based conglomerate China Merchant Port Holdings on a 99-year lease. In an investigation, The New York Times described the entire project as a "debt trap".

In total, the port cost $1.4bn, but has barely broken even on revenues of a few million dollars a year. Today it's largely unused. It's now considered likely that Hambantota will become a base for the Chinese navy in a highly strategic area.

Steamroller

The Belt and Road juggernaut continues apace in other regions though. According to President Xi's own assessment, by September, China's outward direct investment exceeded the $60bn mark and has attracted trade with Belt and Road countries of more than $5 trillion.

In early September, Exim Bank, one of the financing vehicles for Belt and Road, agreed a $500m deal to fund a series of modular refineries in the strife-torn Niger Delta of Nigeria. At the same time, China State Construction Engineering won a breakthrough contract to build a $6bn greenfield refining and petrochemicals complex in Egypt.

An alarmed Brussels has just unveiled a response to Belt and Road. Dubbed "Asia Connectivity", Europe's alternative won't saddle countries with debt they can't repay, according to the European Commission. Although discussions have been going on with Asian countries for some time, no specific projects have yet been put on the table, including for oil and gas.

If Malaysia's pipelines were, however, to go ahead under Asia Connectivity, it would certainly be a blow for Belt and Road throughout the region.

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