Malaysia has cancelled a $20 billion rail project financed by China, a minister said Saturday, citing high interest costs for the government’s decision as he offered the clearest statement that one of Beijing’s largest One Belt, One Road infrastructure initiatives would be scrapped.
Kuala Lumpur, China’s biggest trading partner in Southeast Asia after Vietnam, has pushed back against Chinese dominance in its economy since Prime Minister Mahathir Mohamad returned to power after a stunning electoral triumph in May last year, stalling billions of dollars of contracts.
“We cannot afford,” Mohamed Azmin Ali, Malaysia’s economic affairs minister, told reporters after attending a media event outside the nation’s capital. “The cabinet decided to scrap the project because the cost of development is too high, and we do not have the financial capability at the moment."
Azmin was referring to the East Coast Rail Link (ECRL), a 688-km (430-mile) railway that would have connected the western and eastern coasts of the Malaysian peninsula. The project was being built with contractor China Communications Construction Company Ltd (CCCC).
“The decision has been finalized during a Cabinet meeting two days ago," he said. “It is better for us to make a decision (now) because the investor would also like to have clarity and we have made a decision."
Pushing through with the railway would involve interest payments amounting to half a billion ringgit ($120 million) a year, Azmin said, emphasizing that the project will be terminated without antagonizing one of the nation’s largest investment benefactors.
Kuala Lumpur ran a trade surplus with Beijing last year. It exported palm oil, electronics and liquefied petroleum gas to China, accumulating a trade volume of $92.4 billion that includes imports of machinery and electronic products.
The minister’s statement came against the backdrop of growing concern about China’s spreading influence in Southeast Asia, mostly as a result of Beijing’s multibillion-dollar infrastructure initiative to build roads, railways and ports, a move that has stoked fears of ballooning debt in the region's poor nations.
It was not clear if CCCC, the contractor, has been informed of the government’s decision.
Azmin also did not say how much compensation Malaysia would shell out for terminating the project, explaining that the amount would be determined by the finance ministry.
Oh Ei Sun, senior fellow with the Singapore Institute of International Affairs, said the cancellation would not affect the overall bilateral relations between Kuala Lumpur and Beijing.
“Of course, it would strain relations a bit, but the overall bilateral relations, economic and otherwise, remain fundamentally strong and not to be soured just due to one project,” he told BenarNews.
But political analyst Awang Azman Awang Pawi said the announcement might slightly impact bilateral ties.
“It will hurt ties between Malaysia and Chine a bit but it depends on the compensation,” he said. “If the amount can be agreed, I do not think this will become a major problem. Both countries can work again in the future.”
Azmin’s statement appeared to contradict earlier remarks from other cabinet officials, including Finance Minister Lim Guan Eng, who had said that the decision on the project was not final, according to the South China Morning Post.
But the newspaper quoted two unnamed sources with knowledge on the cabinet’s decision as saying that Azmin had expressed Malaysia’s final position: that the existing contract with CCCC would be terminated.
The Singapore-based Straits Times newspaper reported that the contract, which was supposed to receive financing from the Export-Import Bank of China, was terminated after Malaysia failed to reduce the project cost by about one half.
Mahathir, 93, told reporters on Thursday that he was “not sure” whether the ECRL contract had been terminated, as he just returned from work visits in the UK and Vienna.
“I just came back from overseas,” he said.
Early this month, China’s envoy to Malaysia Bi Tian said he hoped that negotiations to resume ECRL construction would succeed. He made the statement after Mahathir said the project might proceed but in a “smaller scale.”
The railway project was among the $34 billion worth of infrastructure projects approved by the previous government of Najib Razak, who once hailed it as a “game changer’ for the Muslim-majority nation.
According to a report released last year by the U.S.- China Economic and Security Review Commission, the ECRL project is the second-largest One Belt, One Road project. The planned 772-km (482-mile) high-speed railway line connecting Moscow with Kazan city in the Russian Federation would cost slightly higher at $21.4 billion, it said.
Najib, who has enthusiastically endorsed Beijing-linked projects, faces 39 criminal charges linked to the troubled state development fund 1Malaysia Development Berhad, which he established in 2009. The U.S. Justice Department alleges that almost $4.5 billion (18.7 billion ringgit) from the state fund was embezzled and laundered through real estate and other assets.