Table of ContentsIntroductionChina's EconomyMalaysia's EconomyChina's Investment and Trade with MalaysiaChallenges Federal Government DebtForest City ProjectAnalysisConclusionIntroductionAccording to Bloomberg (2017), it was reported that "China is already the world's largest economy and has surpassed the United States." This implies that China can be considered a formidable superpower in terms of economic supremacy. With GDP growth averaging 10 percent per year over the past three decades, it is no understatement to suggest that China will remain the world's largest economy for the foreseeable future. This economic growth has sparked much debate across the world, with the availability of investment opportunities as well as the economic and security threats posed by China. Say no to plagiarism. Get a tailor-made essay on “Why Violent Video Games Should Not Be Banned”?Get the original essayHowever, these doubts and concerns were seen differently by the then Malaysian Prime Minister, who thought so. “The growth of the Chinese economy and the current accession to the WTO will amplify challenges and increase opportunities rather than being seen as a threat to Asian regions in terms of economy and security.” Under the presidency of Tun Mahathir, the current Malaysian Prime Minister emphasized that Malaysia would build better relations with China as it would bring mutual benefits to both sides by focusing on economic development rather than confrontation. This article will attempt to understand and highlight the opportunities and challenges arising from China's economic rise and its impacts on the Malaysian economy under the new administration. The Chinese Economy Over the past three decades, China's economy has been impressive. Gross development product (GDP) grew by an average of 10 percent per year and more than 500 million people were lifted out of poverty (World Bank, 2013). In the first quarter of 2018, Chinese economic activity is expected to remain resilient, with GDP growth of 6.8 percent. However, the long-term trend is expected to be slower due to slowing investment growth, while consumption remains the main driver of the economy. Nevertheless, GDP growth is expected to moderate to 6.5 percent in 2018 and to an average of 6.3 percent over the next two years (China Economic Update, 2018). Although its economy is expected to remain stable in the near future, one of the big challenges for China's economic development would be the ongoing trade war between it and the United States of America. According to the South China Morning Post (2018), China views the trade war as a long and difficult battle and has stated that the United States views China as a major threat to its "America First" strategy. Given this situation, it remains to be seen whether a resolution would exist between the two parties. What impact would this situation have on Malaysia's economy?Malaysia's EconomyAmong ASEAN member states, in 1974, Malaysia was the first country to establish diplomatic relations with the People's Republic of China (which will henceforth be called RPC). Through ASEAN, Malaysia has enjoyed positive economic relations with the PRC, especially after the ASEAN-China Free Trade Agreement (ACFTA) came into force in 2010. In its infancy, ACFTA was the world's largest free trade zone with a population of 1.94 billion and a combined GDP of over $9 trilliondollars. The historic outcome of Malaysia's recent elections provides an unprecedented opportunity for change. Under the new government, Malaysia's economic policy framework is primarily guided by its Buku Harapan election manifesto. According to the World Bank (2018), Malaysia's economy is expected to grow at a rate of 5.4 percent in 2018, supported by stronger growth in the Malaysian economy. household consumption. Currently, the main driver of its economy is private consumption, which is expected to accelerate at a rate of 7.0 percent in 2018. It is also reported that Malaysia is on track to successfully transition from an economy to upper-middle income to a high-income economy in the next two to six years. In 2017, its gross national income (GNI) was US$9,650, US$2,405 below the threshold of US$12,055 that the World Bank currently sets to define high-income country status. Regarding the impacts of the trade wars between China and the United States, it has been widely reported that this situation could have a negative impact on the Malaysian economy due to the pressure on its foreign trade volume. At this rate, if the trade war continues to escalate over the coming months, In two years, Malaysia could slide into a recession and record negative GDP growth. However, according to Tun Mahathir (2018), the Malaysian Prime Minister was of the view that Malaysia would likely benefit from the situation to attract foreign investors. Tun Mahathir further said that the economic policies implemented in this trade war would benefit investors who could not invest in certain countries, thereby benefiting countries which were not involved in this trade war. , One Road” (OBOR), which was later renamed “Belt and Road Initiative” (BRI). From Southeast Asia to Eastern Europe and Africa, the BRI includes 71 countries that account for half of the world's population and a quarter of the world's gross domestic product. The Belt and Road Initiative is expected to cost more than $1 trillion, although there are conflicting estimates of how much has been spent so far. According to one analysis, China has invested more than $210 billion, the majority in Asia. . Today, financial flows to Malaysia have seen an increase in Chinese investment of 1,064% between 2012 and 2015 (see charts 1 and 2). China is expected to continually affect the growth trends of the Malaysian economy due to its rapid economic growth and the size of its economy. . This is evident through a growing number of capital and investment goods, components and sub-assemblies, spare parts and primary products imported by China. In essence, China's foreign direct investment is extremely important to Malaysia's economy. According to the Ministry of Trade and Industry (2018), Malaysia's trade with China absorbed 17.3% of Malaysia's total trade and increased by 19.4% to RM28. 31 billion in July 2018. Malaysia's exports to China remained strong and recorded the highest monthly export value of RM12. 92 billion, a growth of 37.5% compared to 2017. This was attributed to the increase in exports of electrical and electronic (E&E) products, chemicals, liquefied natural gas, petroleum products and petroleum raw. In the first seven months of 2018, Malaysia's total trade with China increased by 8.9% to RM177. 49 billion compared to 2017. Total exports toChina were 12.1% stronger at RM77. 48 billion, attributed to increased exports of E&E products, chemicals, manufactured metal products as well as optical and scientific equipment. Malaysia's imports from China also increased by 6.6% to RM100. 01 billion. Despite Malaysia's generally favorable stance towards increased foreign direct investment and positive trade outcomes, there is considerable domestic dissent towards the growing presence of Chinese investment in the country. Challenges Federal Government Debt Apart from the growing trend of dissent towards Chinese investments, another challenge would be the rising amount of debt and liabilities of the Malaysian Federal Government exceeds RM1 trillion. As illustrated in Figure 3 below, the Federal Government's debt stood at RM686. 8 billion (50.8 percent of GDP), government guarantees amounted to RM199. 1 billion (14.6 percent of GDP) and rents for public-private projects of RM201. 4 billion (14.9 percent of GDP). Regarding this large debt, Tun Mahathir blamed his predecessor Dato' Seri Najib Razak for pushing Malaysia into a debt trap and said the following: "They borrowed huge amounts of money and now we are having problems trying to repay the money they owed. This is not foreign direct investment. “The biggest example is the East Coast Railway Line (ECRL). State-owned China Eximbank will provide MYR55 billion for the project. Malaysia will only start repaying after seven years, when construction is expected to be completed, and over a period of 20 years. The Malaysian government will act as guarantor to Malaysia Rail Link Sdn Bhd, a special purpose vehicle established by the Malaysian government to receive the soft loan and oversee delivery. However, it has already been announced that the main contractor to build the ECRL will be another PRC state-owned company, the China Communication Construction Company (CCCC). There is an obligation for CCCC to subcontract certain parts to local companies, but the larger picture remains one where Malaysia borrows money from the PRC and will immediately use a large sum of that money to pay a company in the RPC. After seven years, Malaysia will once again have to repay the loan plus interest to the PRC. Not only will the PRC get back a substantial portion of its money immediately as payment for work done by its state-owned CCCC, but it will also receive more money when repayment begins along with interest. Ultimately, in the long term, there will always be an outflow of funds from Malaysia to the PRC. This will happen even if the ECRL is not profitable, as the risks and liabilities are borne by Malaysian taxpayers through the government guarantee on the loan. Tun Mahathir further said that the government would review these loans and related projects which would not be beneficial to the Malaysian economy anyway. Malaysia should avoid the situation that happened to Venezuela. China gave Venezuela a soft loan of $63 billion between 2007 and 2014, and the repayment was supposed to be made with oil. When the price of oil fell by more than half during this period, Venezuela's repayment cost doubled. China has refused to renegotiate the terms of what was supposed to be a soft loan, leading one commentator to say that "Venezuela's path to disaster is littered with Chinese money." Since 2013, Venezuela's economy has been in a statedisastrous, with high inflation and difficulty repaying debts. If China wants the BRI to succeed in countries like Venezuela and Malaysia, it must ensure that expensive infrastructure projects do not harm these countries' economies. Otherwise, trade and investment between these countries and China will suffer. According to The Guardian (2018), the Center for Global Development found that eight other Belt and Road countries were at serious risk of not being able to repay their loans. These countries include Djibouti, Kyrgyzstan, Laos, Maldives, Mongolia, Montenegro, Pakistan and Tajikistan, all of which are among the poorest in their respective regions and will owe more than half of their external debt to China . Forest City ProjectAccording to Bloomberg (2017), the Forest City project in Johor is a Malaysian version of Shenzhen, largely backed by Chinese developers and buyers with hotels, offices, golf courses, technology parks and a large number of new apartments. The 20-year project was announced in 2006 with a total investment of RM383 billion ($87 billion). This metropolis is expected to accommodate 700,000 people, initially expected to come mainly from China. In late 2016, it opened its second international sales office in an upscale neighborhood of Kuala Lumpur, and further sales galleries are planned in Taiwan, Myanmar, Dubai and Indonesia. Middle-class Chinese who cannot afford housing in China's expensive urban centers such as Beijing and Shanghai have been the main customers targeted by this development. Recently, Tun Mahathir made a remark against the Forest City project developments and said he would support the desire for the Forest City project houses to be sold to foreigners if the developer wants Malaysians to live in wooden houses. This remark indicates that Tun is genuinely concerned about the developer's priorities in producing affordable homes for Malaysians. The Edge Markets (2018) reported that Forest City would consider building affordable housing tailored to local needs. Developers are expected to produce such affordable homes for residents over the next three years. However, it remains to be seen whether such affordable house projects will bear fruit without any action plan. South China SeaChina and Malaysia dispute parts of the South China Sea north of Borneo. It has been widely reported that China has militarized at least three features of the Spratly Island chain. For Malaysia, it is particularly active in underwater oil and natural gas drilling near these islands. China is expected to take a pragmatic approach to Malaysia's new stance rather than resisting it. Both countries would like their joint investments to bear fruit. If China were to become more aggressive at sea, Tun Mahathir would likely make this act public rather than let it pass. The more aggressive China is in the disputed area, the more Malaysia will be heard on the international stage. Going forward, Malaysia should be bold in calling for the demilitarization of occupied areas, an end to the permanent stationing of warships near claimed areas, and a moratorium on the conduct of provocative naval exercises in the South China Sea. That being said, analysts said Tun Mahathir's more assertive stance on the South China Sea was unlikely to pose a challenge to Beijing, which is Malaysia's largest trading partner.AnalysisChina, with its..