A China Bailout in Malaysia’s 1MDB Scandal?

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A China Bailout in Malaysia’s 1MDB Scandal?

A closer look at mounting evidence about an alleged deal between China and the former Malaysian government and its wider significance for ties.

Earlier this month, new evidence surfaced regarding China’s efforts to strike a deal with the former Malaysian government back in 2016 to bail out the struggling 1 Malaysia Development Berhad (1MDB) state fund at the center of a billion-dollar scandal allegedly implicating former premier Najib Razak in exchange for deals tied to the Belt and Road Initiative (BRI). The details have once again put the spotlight on the management of Malaysia-China relations under the previous government as well as how such dynamics are dealt with by Beijing and smaller states in the wider Indo-Pacific region.

As I have noted before in these pages and elsewhere (see, for instance, here and here) one of the allegations that had dogged the previous Malaysian government under Prime Minister Najib Razak was that it had leaned closer to China, including agreeing to billions of dollars’ worth of infrastructure projects of questionable value to Malaysia amid assistance Beijing had allegedly offered to provide with respect to the 1MDB scandal. While those suspicions have persisted amid ongoing investigations on the 1MDB scandal in Malaysia as well as in other countries and some evidence has surfaced regarding irregularities and shadowy developments under the new Malaysian government led by former prime minister Mahathir Mohamad, to date the level of publicly available information has been insufficient to suggest a clear and direct linkage.

But over the past year, a series of new publications, combined with ongoing investigations from the new government about Najib and the 1MDB scandal, have resulted in additional scrutiny on this linkage as well as more revealing evidence. These include new books released by journalists at The Sarawak Report and The Wall Street Journal – both of which have played leading roles in disclosing information on the 1MDB scandal – and claims by Malaysian government officials with various levels of substantiation amid seizures and revelations as 1MDB scandal investigations continue to be conducted on Najib himself and others.

Earlier this month, another round of new evidence about this aspect of China-Malaysia relations surfaced which could strengthen the case for a potential linkage. The details, which emerged from minutes in a series of previously undisclosed meetings in documents seized by the new Malaysian government reviewed by the The Wall Street Journal and published in a report dated January 7, suggested both specific ways by which China had actually been assisting the Najib government defuse the continuing fallout from the 1MDB scandal, as well as evidence that the Najib government had knowingly provided preferential treatment to China on infrastructure projects in spite of questions that remained about the viability of those projects.

The first aspect of this is China’s offer of assistance to the former Malaysian government regarding managing the fallout from the 1MDB scandal. There had already been ongoing suspicions on this aspect of the potential 1MDB link, with suggestions of secret meetings between officials on both sides that delved into this issue as well as the indirect role of individuals such as Low Taek Jho, better known as Jho Low, a Malaysian businessman who has been a central character in accounts of the 1MDB scandal, is currently wanted by Malaysian authorities, and had believed to be in hiding in China.

But the report contains some new revelations as well. Particularly striking is the confirmation in a series of 2016 meetings by Sun Lijun, vice minister of the Public Security Ministry, that the Chinese government was surveilling the WSJ in Hong Kong at Malaysia’s request, including device tapping, computer, phone and web data retrieval, and full operational surveillance. “Mr. Sun says that they will establish all links that WSJ HK has with Malaysia-related individuals and will hand over the wealth of data to Malaysia through ‘back-channels’ once everything is ready,” the Malaysian summary of that meeting reportedly reads. “It is then up to Malaysia to do the necessary.” The summary also notes that Sun promised to use China’s “leverage on other nations” to get the United States and other countries to drop their 1MDB investigations.

Though allegations of Chinese government-related surveillance of this sort is hardly new, this represents the most direct evidence to date of such efforts within the context of the 1MDB scandal. And while there is no evidence that any of these efforts were actually met with success – either in terms of information delivered to the Malaysian government or the slowing or suspension of investigations ongoing in several countries – the very fact that such discussions occurred is nonetheless quite significant in and of itself.

The second aspect of this concerns Malaysia’s asking for Chinese financial help on 1MDB. Concerns on this front are not new. For instance, back in 2016, The Sarawak Report had suggested that there were indications that projects in Malaysia-China relations such as the East Coast Rail Line (ECRL) were structured in such as way as to allow for Chinese companies to pay for certain 1MDB assets that extended out several years.

But the new evidence is revealing in that it sheds additional light into the process by which this occurred. The documents reportedly show the former Malaysian government asking the Chinese state company China Communications Construction Co. building the East Coast Rail Link to assume $4.78 billion of 1MDB debt, and, following worries on the Chinese side that this would be “very noticeable” on financial statements, another proposal from Malaysia a month later that Chinese state companies instead make payments that would “indirectly be used to repay 1MDB debt.”

Suffice it to say, the level of detail here on the alleged back and forth between Malaysian and Chinese officials is quite revealing, down to the various proposals floated about how Beijing could provide 1MDB-related assistance without scrutiny because it suggests that the level of discussion was quite advanced. And while there has yet to be a direct linkage between these attempts as well as how they translated into the actual deals – the closest in the public domain so far has been the suggestion of specific alleged project amount differentials first disclosed by The Sarawak Report – the very fact that there is evidence of such an occurrence is itself notable.

The third and final aspect of this relates to the fact that the former Malaysian government may have approved certain infrastructure projects for political reasons in spite of the knowledge that they were not commercially viable. Here, too, there had already been indications on this front. In particular, since coming to power last year, government officials, including Mahathir himself as well as Finance Minister Lim Guan Eng, have suggested that the prices for some of the infrastructure projects negotiated under the Najib government were higher than they needed to be, which accounts for why the current government is reviewing them.

But the new evidence sheds light into some more concrete aspects. For instance, the WSJ emphasizes the notes of a discussion in September 2016, just months before a series of key infrastructure deals, including the ECRL, were to be signed, say the sides agreed to move ahead with the deals even though “they may not have strong project financials,” and that participants need not “waste time” studying those because the government had backed the deals for strategic reasons. Minutes of the meeting also indicate directly that both sides had worked to ensure that the Malaysian would believe that “all initiatives are market driven” – which, if true, would suggest attempts to deceive the Malaysian public – and that Chinese efforts in this regard had the attention of top leadership, including President Xi Jinping and Premier Li Keqiang.

To be sure, the evidence presented does not definitely prove that the agenda by the Malaysian government for the approval of these infrastructure projects was exclusively political or 1MDB-related. Indeed, it is admittedly difficult to prove a direct and exclusive political motive or 1MDB-related connection, in part because of the fact that there were several other motivations that could be linked to the approval of these projects as well, including efforts by the Najib position to shore up Malaysia-China relations more generally as a foreign policy objective as well as broader corruption issues independent of the scandal itself. It is also worth noting that this only covers a couple of key projects within Malaysia-China relations, especially in the context of the unsurprising extrapolation that has ensued about economic ties more generally and the conduct of Beijing’s BRI in the wider Indo-Pacific region.

Nonetheless, the combination of suggestions of efforts by Malaysian officials to link infrastructure projects to the 1MDB scandal to funnel money, direct acknowledgement of preferential treatment in terms of evaluating the cost of these projects, and a deliberate effort to conceal facts from the Malaysian population, make that link stronger than it had been before. It also reinforces the idea of a general gap between market-based considerations in these projects and the political rationale for them, which is in of itself significant independent of the 1MDB factor (although that gap admittedly exists to a degree in other projects as well far more commonly than often appreciated).

It is worth noting that specifics are much thinner on a number of other links made in the WSJ report. For instance, though there is mention of notes from the meeting that Malaysia was working to enhance bilateral ties, including Najib’s support for China’s position in the South China Sea during an ASEAN meeting in Laos, it is unclear how exactly this constituted a divergence from Malaysia’s usual approach to the South China Sea, and to what extent this was motivated by any 1MDB-related issues (See: “Malaysia’s South China Sea Approach: Playing it Safe”). There are also suggestions in the report that Najib embarked on ultimately unsuccessful secret talks with Beijing to let Chinese navy ships dock at two Malaysian ports, but little evidence is offered as to why this was not successful (as I have noted, there had been various proposals advanced, and some Malaysian officials had expressed concerns about such proposals independent of 1MDB) (See: “Why Did China’s Navy Gain Use of a Malaysia Port Near the South China Sea?”). Perhaps this will be disclosed in due time as more documents become available, and as more officials go on the record on what occurred.

More broadly, as revealing as these allegations are, it is important to maintain objectivity and caution about what they say and what they mean. Of particular note is the fact that, since the evidence provided in the report comes out of interpretations of selective documents seized by the current government from the former Najib government and conversations with unspecified officials, until the full range of documents are actually made publicly available, there will be natural questions about how representative they are of the full range of material and the agendas of those who are providing parts of the full material. This is especially given the highly-politicized nature of the 1MDB scandal and the current government’s efforts to renegotiate deals with Beijing and implicate Najib and his administration. There are also additional complications, including the fact that some of the alleged Chinese money funneled into projects and other various sources had already begun flowing in accordance with timelines set out before some of the taps were turned off by the current government.

Of course, that should not detract from the new striking revelations that have been disclosed, what they mean for the suggestions of some sort of Chinese bailout for Malaysia’s 1MDB scandal under the former government and what China may have gotten in exchange, and what this says about how Beijing and smaller Asian states exert leverage on each other, including via shadowy deals and arrangements, to realize their own political, economic, and strategic interests. But it does suggest that this is very much a discussion that can be expected to continue as we get more evidence disclosed over the course of 2019 and beyond, including from those close to figures such as Najib and Jho Low who have fiercely denied the allegations thus far.