Malaysia - friendship with China or business with the USA
Over the past few years, the level of trust in the United States as a reliable strategic partner in Southeast Asia has been rapidly declining. In 2024, more than half of the region's states favored China as a guarantor of regional security, while the Philippines, Singapore and Vietnam were in the minority on Washington's side. High on the list of countries supporting Beijing is Malaysia, which, despite its seemingly "pro-China" position, is clearly benefiting from cooperation with the US. Over the past two years, many Western companies, seeking to diversify the supply chain of critical goods, have moved their technological production from China to Malaysia. At the same time, the country is already the sixth largest exporter of semiconductors in the world and packs 23% of all American chips. It is being said that Kuala Lumpur has become an unexpected beneficiary of the U.S.-China race, having demonstrated a high level of adaptability to the new geopolitical realities.
From territorial disputes to constructive cooperation
The history of China-Malaysia relations is rather contradictory. Despite the Kuala Lumpur administration's consistent policy of rapprochement with China, the issue of territorial claims in the South China Sea remains acute in the region. In the late 1940s, China outlined a zone of its own interests from Hainan Island to the coasts of Malaysia and Brunei, thereby affecting the territorial integrity of the present-day Philippines, Brunei, Malaysia, Taiwan, and Vietnam. Beginning in the 1980s, Malaysia began to challenge the PRC's established "nine-point line" and pursue a distinctly anti-Chinese policy in the region. First, Kuala Lumpur took control of the Layang Layang Atoll by building a dock for warships, then occupied Terimbu Ubi and Mantanani reefs, and established submarine bases on Labuan Island off the northern coast of Sabah state.
All of these territories, in addition to their important logistical and strategic significance, are valuable as mineral-rich islands. The Nansha (Spratlys) and Sisha (Paracel Islands) archipelagos, over which the dispute between China and the Philippines flared up again in the fall of 2023, resulting in a series of incidents involving the maritime security of both countries, are of special importance not only for the direct participants in the conflict - Brunei, Vietnam, China, Malaysia and the Philippines, but also for the United States, which seeks to strengthen its own position in the South China Sea, supporting anti-Chinese sentiments on the part of Vietnam and the Philippines. This is largely due to the fact that, according to experts from the U.S. Geological Survey, 11 billion barrels of oil and 5.9 trillion cubic meters of gas lie in the depths of the sea. Chinese experts estimate that these figures are higher - 230 billion barrels of oil and 16 trillion cubic meters of gas.
In 2006, Malaysian state-owned company Petronas and Chinese state-owned oil and gas corporation China National Offshore Oil signed a 25-year agreement to supply liquefied natural gas to China. This contract was unprecedented, as it actually meant that Malaysia recognized the fields located 200 miles off the coast of the state of Sarawak, which are part of the PRC's claim zone, where the production of raw materials took place. In 2021 it became known that the agreement was extended: Petronas will supply 2.2 million tons of LNG per year to the Chinese corporation for another 10 years, and the total amount of the deal is estimated at $7 billion.
In August 2023, the Ministry of Natural Resources of China released a new map of claims in the South China Sea, on which a number of water areas belonging to the exclusive economic zones of Brunei, Vietnam, Indonesia, Malaysia, and the Philippines were designated as part of China. At the same time, since the end of 2013, Beijing has been carrying out large-scale hydraulic engineering and construction work to create artificial islands in the Spratly archipelago, which can be used for the establishment of radar monitoring systems and military ports. In addition, the PRC needs to formalize the territories of the archipelago in order to exclude the possibility of blockade (including with the assistance of the United States) of the Strait of Malacca, which is controlled by Indonesia, Malaysia and Singapore. The Strait of Malacca serves about one-fifth of all maritime trade, 60% of Chinese trade and up to 80% of Chinese hydrocarbon imports pass through it.
Despite territorial differences, China and Malaysia have always sought to establish bilateral dialog based on common traditions, culture and the principle of "good neighborliness". An important fact is that a quarter of Malaysia's population is Chinese, currently the second largest Chinese diaspora in the world. Today, the Kuala Lumpur administration views Beijing more in terms of foreign economic opportunities rather than a threat to national security. The official position is also supported by the local population, about 70% of citizens are in favor of expanding and strengthening trade cooperation with the rapidly developing region. Thus, in 2023, 19 memorandums of understanding were concluded between Chinese and Malaysian officials for a record $38 billion, this amount is equivalent to 10% of the country's GDP.
China has long been Malaysia's first largest trading partner, overtaking Singapore and the United States. The total trade turnover of the two countries in 2022 amounted to $110.6 billion, the volume of direct investment from China - $12.5 billion. Among the largest Chinese initiatives - the construction of a petrochemical plant in the state of Johor and a plant of electric cars under the Geely concern.
A community of common future
China's rather aggressive policy in the South China Sea does not prevent Asian countries from joining numerous coalitions. ASEAN, APEC, the ASEAN Regional Forum (ARF), the ASEAN Defense Ministers' Meeting (ADMM), ASEAN+8, the East Asia Summit - these are only a small part of the structures in which the countries of the Asia-Pacific region are members.
In 2023, the PRC held joint military exercises "Peace and Friendship - 2023" with 5 ASEAN countries - Cambodia, Laos, Malaysia, Thailand and Vietnam, within the framework of which the actions to ensure security at sea were practiced. More than 3,000 military personnel took part in them, the exercise was the third such integration, which began as a joint action between Malaysia and China in December 2014.
In January 2024, seven ASEAN member states (Cambodia, Indonesia, Laos, Malaysia, Myanmar, Thailand and Vietnam) signed an agreement with China to create a "community of common future." This treaty legally confirmed that the countries regard their relations with China as a strategic choice and top foreign policy priority, and the PRC, for its part, views them as a full-fledged strategic partner.
In addition, Beijing and Kuala Lumpur are discussing the creation of an "Asian Monetary Fund" following Washington's threat to block Malaysian banks' access to dollar-dominated banking systems in case of Malaysia's loyal stance to PRC's territorial claims, particularly in the issue of the Sarawak coast, where numerous gas fields are located. It is expected that the idea of creating a regional fund, which, according to the proposal of the Malaysian side, will also include China, Japan and South Korea, will reduce the dependence of the Asian region on the dollar.
We cannot have the international infrastructure being decided by outsiders. We can work with them but we should have our own domestic, regional and Asian strength, not necessarily to compete but to have a buffer zone (against economic crises).
Malaysia is the new China in the world of microelectronics
Geopolitical tensions between China and the United States are associated with problems of security and sustainability of established global supply chains. All this pushes Washington to search for new, and sometimes to strengthen established production centers outside China. In this context, Malaysia, already an established part of the semiconductor supply chain, is seen by the United States as a conditionally "neutral" strategic partner and an ideal substitute for China. For this purpose, the country has all the necessary resources: prepared production facilities, ready-to-cooperate companies and experienced workers. Malaysia currently accounts for 13% of the global semiconductor packaging, assembly and test market, and this is expected to grow to 15% by 2030.
Today, Malaysia is positioning itself as a neutral jurisdiction for technology industries from around the world and a data center. In addition to Intel, which has long been based in Malaysia, Tesla and Amazon have moved their offices to the country, Amazon is planning to invest around $6 billion in cloud computing infrastructure in the region by 2037. German manufacturer Infineon has announced an investment of $5.5 billion, and Apple is also named among the possible re-locant companies.
The amount of investment allocated is unprecedented for the region, and the burst of investment is a testament to Malaysia's growing importance in the global supply chain. The national government is trying its best to encourage business development by creating special economic zones dedicated to electronics manufacturing. These zones offer tax incentives, streamlined regulations and ready-made facilities. More than 300 companies are registered in Penang and Kulim alone (the largest industrial cities in Malaysia, where free economic zones are located). However, in practice, Kuala Lumpur is not always ready for the large-scale migration of Chinese representative offices to the national market: new companies are already facing infrastructural problems - difficulties in finding land plots, logistical problems and a shortage of qualified personnel, who are increasingly flowing to neighboring Singapore.
In recent years, Kuala Lumpur has been looking for structural changes that could qualitatively revitalize the country's economic growth rate. It seemed that such a partner was China, which implements many large investment projects in the region and accounts for a significant part of the country's trade turnover structure. However, the intensifying confrontation between Washington and Beijing opened up unexpected additional opportunities for Malaysia to support national producers by displacing Chinese competitors under the economic patronage of the United States. Seeking to capitalize on its attractiveness as a neutral link in the global supply and data chain, the Kuala Lumpur government faces the challenge of balancing consistent friendship with China against future imminent American restrictions that will naturally arise from the countries' geopolitical rivalry.
Moreover, these attempts at balancing will only become more difficult as disputes in the South China Sea - one of the most unstable points on the world map where the interests of major economic and political players converge - continue to flare up. Current trends suggest a shift of regional interests toward China as a guarantor of security in the Asia-Pacific region and a decreasing focus on the United States as a reliable strategic regional partner, but it is unlikely that this will lead to a fundamental change in regional geopolitics and Washington's withdrawal from Southeast Asia in the near future.
