A file picture shows Prime Minister Anwar Ibrahim (left) shaking hands with Chinese President Xi Jinping during a meeting at the Great Hall of the People in Beijing. — AP
CHINESE Premier Li Qiang’s visit to Malaysia this month is the most recent high-level engagement to commemorate a half-a-century diplomatic relationship between the two countries.
Trade lies at the heart of the economic ties. Over the past two decades, bilateral trade has grown more than five-fold and now exceeds US$99bil, making China the largest trading partner of Malaysia for the 15th consecutive year.
Almost 15% of Malaysia’s exports are shipped to China while over 20% of its imports come from China. A closer look at the composition reveals that both countries are increasingly embedded in each other’s industrial cycle.
The tech connection in particular stands out. Over 40% of Malaysia’s exports to China is concentrated in the electronics space. Impressively, almost half of those are microprocessors and controller chips – a space where Malaysia has a handsome 10% of global share.
The same also applies to Malaysia’s imports from China, with semiconductor apparatus alone accounting for a third of shipments. But it is also more than just semiconductors – China’s machinery exports to Malaysia are also fairly sizeable, reflecting the former’s significance to the latter’s production chains.
Outside of electronics, commodities also matter. But unlike electronics, commodities largely reflect a one-way relationship, as Malaysia is one of Asia’s few net commodity exporters.
These range from petroleum and palm oil to aluminum and rubber, but it is liquefied natural gas that takes the lead, accounting for the lion’s share of close to 10% of Malaysia’s exports to China.
To deepen future trade linkages, China’s investments in Malaysia are equally important. Since the US-China trade tensions, Malaysia has been emerging as a darling for supply chain relocations.
While China is a latecomer when it comes to outbound investment, it has been catching up quickly to expand its foreign direct investment (FDI) footprint in Asean. In 2023, 20% of Malaysia’s FDI inflows came from mainland China and Hong Kong, double from eight years ago.
In particular, 2018 was a watershed moment for FDI: Malaysia’s approved investment from China quadrupled to over US$5bil in just one year. Despite moderating after the pandemic, China’s FDI inflows have remained elevated.
During Malaysia Prime Minister Datuk Seri Anwar Ibrahim’s first trip to China last year, Malaysia secured FDI commitments from China worth RM170bil covering a wide range of sectors including education, health and automotive.
While sector data on China’s FDI is not available, our analysis of news reports suggests that much of the investment is geared towards Malaysia’s green economy, such as solar module manufacturing and electric vehicles, reflecting further room for cooperation in emerging sectors that are critical to Malaysia’s economic transformation.
There are also opportunities on the consumer side. As China’s appetite for durians continues to grow, Malaysia has joined regional peers in the export race.
Since 2011, Malaysia has exported frozen durian products to China but barriers preventing the export of fresh durians limits its exposure to the China market, which has been dominated by Thailand and Vietnam.
Fortunately, a new deal offers opportunities for Malaysian durian exporters, as Malaysia is poised to conclude negotiations with China by the end of 2024 to be able to export fresh durians.
It is just a matter of time before Chinese consumers can enjoy Malaysia’s famous Musang King and even the more exotic Black Thorn varieties.
Or perhaps the crave for durians will attract more Chinese tourists to Malaysia. Thanks to the implementation of the visa-waiver from Dec 1, 2023, this has become much easier.
While Asean saw a slow return of Chinese tourists in 2023, Malaysia saw the fastest recovery pace, exceeding 45% of its 2019 level of 3.1 million.
Although Malaysia has not released its 2024 tourism figures, high frequency indicators suggest bullish tourism prospects for 2024.
Using the number of direct flights as a proxy indicator of travellers, the recovery pace between Malaysia and China is not far from a full recovery, thanks to Malaysia’s proactive efforts to launch new routes connecting with more Chinese Tier-2 and Tier-3 cities.
While Malaysia is not as dependent on tourism as some of its regional peers, tourism receipts are nevertheless quite sizeable at almost US$21bil, equivalent to around 6% of its 2019 gross domestic product (GDP).
While it has made progress in returning to almost 80% of 2019 tourist levels, there remains substantial room to boost its tourism receipts from 2023’s US$15.5bil (4% of GDP).
Given the revival, the authorities are setting an ambitious target of attracting 27.3 million tourists. This would suggest a 5% rise from 2019 levels, and a further seven million tourists from 2023 levels.
To achieve this, Malaysia is looking to attract more than five million tourists – the lion’s share for new tourists – from mainland China for a speedy revival in tourism. While this may sound ambitious, we believe this goal is achievable.
In addition to the number of tourists, spending power also matters. On average, Chinese tourists spent almost RM5,000, 1.5 times the average spend by a tourist of RM3,300.
More tourist receipts will provide foreign exchange inflows and reduce Malaysia’s services deficit in its balance of payments, in addition to providing a broader array of job opportunities.
All in all, the economic relationship between Malaysia and China carries significant weight on many metrics.
Spanning trade, FDI and tourism, there is potential to extend the relationship, which should further support Malaysia’s growth.
Yun Liu is Asean economist at HSBC. The views expressed here are the writer’s own.
