Mahathir Mohamad came out of retirement, forged an alliance with a former deputy turned political foe, emerged triumphant in the May 2018 general election and took the oath of office as prime minister at age 93. The world was taken aback, to put it mildly, with none more surprised than the leaders of China.
Mahathir made China a major campaign issue. He accused the incumbent, Najib Razak, of “selling out” the country to China, and promised that, if elected, he would review Chinese-financed projects and cancel those that the country could not afford. The threat of cancellation of a China-financed project in Malaysia followed by restoration provides lessons for all concerned.
China struggles with how to deal with this “new” Mahathir. In his first term, lasting from 1981 to 2003, the two nations were mostly on the same page as the Malaysian leader employed his quick wit and acerbic tongue against the West while advocating interests of the developing world.
Now, Mahathir wants to cancel projects guaranteed by his predecessor, in particular, the $13 billion East Coast Rail Link connecting Port Klang on the Straits of Malacca to Kota Bharu in northeast Peninsular Malaysia. Construction started in August 2017. Moreover, in a visit to China, Mahathir warned against “new colonialism” without naming China, though his meaning was clear. China, pretending not to hear, treated him as an “old friend”. Neither side wanted an open break; each nation wanted the project to continue, but on its terms.
In late April, just before Mahathir arrived in Beijing to take part in the second international forum on the Belt and Road Initiative, the two sides reached a deal: China shaved roughly a third off the original cost. In Beijing, Mahathir made it clear that he supported China’s initiative. He even visited the Huawei office to show that Malaysia, unlike the United States, is not fearful or suspicious of the telecom supplier.
Mahathir’s actions have had an impact on other countries and their dealings with China, and they recognise they must drive a hard bargain. After all, 30% is a big discount on any project, especially one that runs into billions.
Developing countries have two cautionary tales from which to draw lessons. There is Sri Lanka, which had to forfeit Hambantota Port to China in a 99-year lease because of its inability to repay debt. That experience gave rise to the “debt trap” narrative.
Malaysia’s story, with its happy ending, provides another lesson: each country must look out for its own interests. No one can expect Chinese bankers to look out for the interests of foreign borrowers.
Sri Lanka, despite its experience, continues to have amicable relations with China and borrow large amounts. Its ambassador in Beijing, Karunasena Kodituwakku, was quoted as saying in early February that his government was seeking a billion-dollar loan on concessional terms for a highway project. The envoy rejected allegations of “debt traps” from China. “China never forced us to take a loan,” he was quoted as saying. “If there is something wrong with the loans we have taken, it’s our responsibility. It’s not fair to blame China or another country.”
The New York-based consultancy Rhodium Group, which conducted a study of 40 cases of Chinese debt renegotiation between 2007 and 2019, said aside from Sri Lanka there was no other case of asset seizure. The 40 cases involved 24 countries in Asia, Africa and Latin America and about $50 billion of loans. In most cases, Rhodium reported, debts had either been written off or payment was deferred.