HUH?! Why did China just bail out 1MDB with RM17 billion??! [Update]

*Tekan sini untuk artikel dalam versi Bahasa Melayu

[Update 4/1/16] This article initially mentioned RM10 billion, but recent dealings between 1MDB and China-based companies has seen the amount grow to about RM17 billion. We talk about it further in the article. If you’ve not read this article before, we highly recommend you read from the start. But if you’ve read this article before and malas read whole thing again, scroll down and look for the update in blue with the same date.

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Everyone just let that sink in for a while. China, one of the powerhouses of the world, has just swooped like Superman in his red underwear, to save the beautiful damsel in distress, Malaysia!

But this isn’t a romance story, no no no. This is a story with a love triangle.

So the other day, it was reported that had China paid 1MDB $2.3 billion (RM 9.83 billion) to buy all of its energy assets. Now we understand if many of you wouldn’t have known that 1MDB even had some power plants to begin with so we’ll try to explain it real quick. Back in June when Arul Kanda released his breakdown of 1MDB’s RM42 billion debt, a big chunk of it consisted of borrowings they made to buy 3 power plants AND the debt that these power plants already had (inherited debt).

According to WSJ, aside from buying 1MDB’s power plants, they also took on an unspecified amount of the inherited debt so while we cannot say for sure, it’s possible that China actually paid 1MDB MORE THAN RM10 billion. (Although technically this doesn’t do us much favours because we made a loss selling these power plants to China.)

But that’s not the topic we’re looking at today la. We’re not that interested in how much China actually paid 1MDB, because what is more puzzling is why China would buy some questionable power plants that 1MDB bought before..

 

China bought power plants from 1MDB that aren’t very valuable anymore?

“This is above the average price-book ratios of power stocks in the region. In fact, it would actually be cheaper to build a brand new plant of the same size than to buy Genting’s 17-year-old one” – Nik Nazmi to FreeMalaysiaToday about the Mastika Power Plant, when 1MDB bought it in 2012.

We’re gonna be mentioning EquitiesTracker a lot in this article because they’re the ones who actually connected the dots in this story (they helped us in a couple of stories like this and this). And one of the things that they pointed out about China buying power plants was that it doesn’t make sense. 

1. Power plants potentially obsolete.

Among the energy assets that were sold to China were 4 gas power plants and 1 coal power plant. Plants that may be in their last days of service.Articles like this and this actually talk about how coal and gas power plants are being phased out as renewable energy becomes more and more plausible.

However, we have also found articles like this and this that talk about how certain countries are looking to phase out their coal power plants and replace them WITH gas power plants. Which is why we say ‘potentially going obsolete’. This might be because a few of them are already more than ten years old.

2. 1MDB’s reputation is bad enough that most non-Chinese people generally want to stay away

Bloomberg reports that its bonds were being traded like junk. Among the reasons for this were 1MDB’s assets not generating enough cash, and the uncertainty surrounding the company. Nikkei on the other hand, reported that when TNB made a bid for 1MDB’s energy assets, their stock prices actually fell to a 2 year low! 

Which means that the business community in general is very wary of 1MDB. But if that’s the case, why China so crazy go and buy RM10 billion worth of assets from them? Well, our friends at EquitiesTracker tell us that their deal with 1MDB could be due to the nature of their relationship with us more than anything else.

 

China and Malaysia actually BFFs long time di

So a couple of weeks ago, we went for a talk organised by our friends at EquitiesTracker.com. It was there that we learned about why so many China-related things had been happening in Malaysia. But first, we establish the relationship.

You could say that historically, Malaysia has always had a close friendship (or some sort of relationship) with China. Take a moment to remember your Sejarah learning days. Remember the name Hang Li Po? While her existence has been disputed, the story goes that as part of China’s alliance with the Melaka Sultanate, she married Sultan Mansur Shah. But for Malaysia as a country, it was actually the father of our PM Najib Razak, Tun Abdul Razak who first initiated ties with China (which was a bold move then because China was “Communist”). Wikipedia also has a very long entry for China-Malaysia relations. 

But in the last decade, it started to look like we were becoming more than just friends. Like seriously at the rate it’s going you might as well brace yourself for a Meg Ryan movie.

For example, China was actually ready to loan us money to pay for the construction of the 2nd Penang bridge. The Malaysian Insider reported that China wanted to loan us RM2.6 billion (and where have we heard that before?) which would have covered more than half of the RM4.5 billion cost of the bridge (with an interest rate of 3% per year for 20 years). Long story short, our gomen did end up taking a loan from them but at a much lower amount of RM1.08 billion.

But that is just one thing that China has been getting involved in on our shores. Back in 2013, it was announced that China’s Xiamen University would be opening a RM1.3 billion university in Malaysia, its first outside China. If that wasn’t enough, it was recently reported that Malaysians have been given a quota for us to buy very exclusive Chinese shares (called A-shares) on their stock market!

Add in a couple more Malaysia-China cooperatives in Kuantan and Melaka, you actually see a fair bit of China’s involvement in Malaysia.

 

Ehhh, why China so tertarik with Malaysia suddenly?

At this point, you may be wondering why the heck is China being so generous in Malaysia and Indonesia.

“Location, location, location.” – Alvin Vong, CEO of EquitiesTracker

Let’s go back to our Sejarah textbook again, SELAT MELAKA (or the Straits of Malacca) was the trade route that made Melaka so successful because of its strategic position. Back then, we were told that it put Melaka in a very strategic position, and 500 years later this is still true.

“A third of the world’s shipping moves through the Strait of Malacca and Singapore Strait each year, including most trade between Europe and China, and nearly all the crude oil that moves from the Persian Gulf to the big Asian economies like China, Japan and South Korea… And the global trade that flows through that bottleneck—only 1.7 miles wide at its narrowest point—is growing.” – CNBC, Sept 2014

Out of 8 chokepoints that are very, very important to world’s oil trade, the Selat Melaka is the 2nd biggest chokepoint (behind the Strait of Hormuz). And this is where China comes in. Reuters reported 80% of China’s crude oil imports passes through Selat Melaka! Which means that, 

If anything were to happen to this channel, then China don’t get their oil.

According to WSJ, China trying to boost its influence in Malaysia is part of their ‘One Belt, One Road‘ plan, and the 1MDB deal is just another step in that direction. We don’t think we’ll be able to examine the whole ‘One Belt, One Road’ project, but in short it’s basically China’s long term plan for a land and sea route (thus belt) to get itself connected to the rest of the world. In shorter, it’s because sea transport is still the cheapest, and its’s most convenient when it’s near land where it’s easy to resupply, and has generally better weather.

It would be nice if China really were trying to make Malaysia feel like we’re the only girl in the world, but the thing is it China may be going for other girls countries as well. Our friends at EquitiesTracker pointed out that China has also been courting another neighbouring country: Indonesia.

Recently China agreed a high-speed railway deal with Indonesia would see China finance 75% of the cost of the project, but own only 40 percent of the railway! So it looks like China may be chasing after Indonesia as well!

OMG DOES THAT MEAN THE LOVE TRIANGLE IS BETWEEN CHINA, MALAYSIA, AND INDONESIA???

 

No, actually it’s America that wanna buat kecoh also

We’d like to apologise for the next image which may be disturbing for some viewers.

You may have heard the news that US President Barack Obama was recently in Malaysia to attend the 27th ASEAN Summit. This recently concluded visit was the SECOND TIME that Obama had visited Malaysia, with his first time being back in April 2014. But prior to that, only one other US President had visited Malaysia before. Wanna guess how long ago?

The only other US President to visit Malaysia was actually the 36th President, Lyndon B. Johnson, back in 1966…nearly 50 years ago! But since then, Barack Obama has come to see us twice in the space of a year and a half! But why are we suddenly so attractive to the USA?

The people at EquitiesTracker believe that the USA is only taking an interest in Malaysia now because they realise how important we are to China. But it’s not just them la. Articles like this, this, and this actually discuss how China and the USA are battling for influence for not just Malaysia, but the whole of Southeast Asia!

It is this rivalry that has led some to believe that even the Trans Pacific Partnership Agreement (also known as the TPPA, which is a trade agreement involving the USA and a few other countries, we talk about it here). was drafted out because the USA wanted to curb the influence of China. This article by Huffington Post even talks about how the US Senate even amended some human rights rules just so that Malaysia could be part of the TPPA (something that we examined in this other article of ours) AND put pressure on China.

All this leaves us with 2 world superpowers vying for our attention. But with so much going on, one has to wonder where does this leave the ordinary Malaysian?

 

When 2 guys chase 1 girl, it’s the girl who untung right?

GENERALLY la.

When you consider the things that China has been doing for us, helping us pay for Penang bridge, build expensive university, and all the other things mentioned above, it’s all good right? And it’s possible that we have more goodies coming our way. E.g. The Kuala Lumpur-Singapore high-speed rail.

With an estimated cost of RM65 billion, the high-speed rail project has been reported to have already attracted the interest of 150 parties, and guess what, China is interested as well. If the example of Indonesia is anything to go by, is it not impossible to consider that China could do the same for us as well?

On the other hand, while the TPPA may be getting a lot of criticism, there is reason to believe that it may actually be a not-that-bad a thing for Malaysia.

In a nutshell, it looks like we would benefit in terms of economy and infrastructure. But honestly there’s more to the story than what we are able to tell in one article, and if you want to know more, EquitiesTracker is actually having a whole event about it day after tomorrow (which you can check out here, and yes we’re going but NO we also paid for tickets). Event over ugaizz  😥

[Update 4/1/16]

OMG UGAIZZZ guess what??!!! China did it again! Just before the turn of the new year, it was reported that a China-based company (together with this other Malaysian company), had just bought 60% of 1MDB’s stakes in Bandar Malaysia (some super high tech city project spearheaded by 1MDB). Why is this such a big deal? Well, the Bandar Malaysia project, together with the Tun Razak Exchange project, have always been controversial because of claims that 1MDB had valued these projects wayyy more than what they are worth. 

But with all the noise surrounding it, 1MDB eventually decided to sell off these projects to reduce their debts.

And now that China has once again decided to give 1MDB another few billion ringgit (RM7.41 billion this time) bringing the total amount of money to about RM17 billion, this love triangle looks like it’s now in full swing. 

 

 

But if we’re the hot chick, why are we still feeling so down?

It’s been a tough year for Malaysia, not least of which our currency is down 24% in less than a year. Ironically, it’s ALSO due to the countries who are trying to win our hearts. We discuss our Ringgit dropping in this article but it’s basically because

1. The US Dollar is getting stronger.
2. China lowered the value of their currency, which in turn affects our currency because our largest export market is China.
3. Some Malaysian very thick skin

“Unlike most of its Asian counterparts, Malaysia is a net oil exporter, so slumping oil prices hurts its currency. But political uncertainty also prompted foreign capital flights.” – Barrons.com

Aiyo. Such a love-hate relationship. Actually, it’s an indication to the influence of these countries that even Obama visiting us caused our Ringgit to go up again by 1.8% in a single day.

But actually, the one thing you start to realise here is that Malaysia is truly BLESSED. Not only are we a country that is abundant in natural resources and (generally) free from natural disasters, we ended up being located in one of the most essential straits in the world, which means that even if we do nothing, people will still want to kow us.

And maybe that’s also part of the problem. There is a theory coined by British economist Richard Auty called The Resource Curse, which explores why resource-rich countries tend to have underperforming economies compared to their resource-poor neighbours (stop laughing Singapore!).

“This is hypothesized to happen for many different reasons, including a decline in the competitiveness of other economic sectors, volatility of revenues from the natural resource sector due to exposure to global commodity market swings, government mismanagement of resources, or weak, ineffectual, unstable or corrupt institutions” – Wikipedia

Sound familiar? How about this one?

“Pretty girls just lie there. Us girls who grew up a little more homely have to try a lot harder. That’s why pretty girls never threaten me—it’s like, yeah, you want to take me on? Go for it.” – Courtney Love