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Risky Business
China Set to Bail Out Malaysia?

As Malaysia continues to struggle with the fallout from its scandalous and debt-ridden sovereign wealth fund, 1MDB, the Financial Times reports that Beijing is again stepping in to lend a helping hand:

Malaysia’s troubled state investment fund 1MDB is preparing to make a repayment, with Chinese assistance, to Abu Dhabi’s state-owned International Petroleum Investment Company, as it seeks to settle a dispute in which the Emirati fund is claiming about $6.5bn. […]

The relationship between the two funds — once hailed as a “strategic partnership” between Abu Dhabi and Malaysia — has gone sour amid allegations that Emirati officials were involved in a plot to siphon more than $1bn from 1MDB. […]

China has been approached as a source of funds for 1MDB, according to three people with knowledge of the matter, one of whom said Malaysia would swap assets for financing.

This is not the first time that China has ridden in as a white knight to save Malaysia’s troubled state investment fund. In November 2015, the Chinese reached a multi-billion dollar deal to buy power assets from 1MDB and take on an unspecified amount of debt. That financial support offered welcome relief for Prime Minister Najib Razak’s government, and arguably encouraged Malaysia’s reorientation toward China. In that regard, China’s big money diplomacy with Malaysia appears to be paying off as Kuala Lumpur pursues stronger defense ties and bilateral projects with Beijing.

Still, China’s penchant for such politically motivated sweetheart deals incurs serious risk. We have seen the repercussions before: in Venezuela, for instance, the Chinese poured billions of dollars to prop up a failed socialist government that now may not be able to repay its debts. Throughout Africa, a host of Chinese-funded oil and gas boondoggles have forced debt renegotiations. And in Malaysia’s case, Beijing continues to throw money at a kleptocratic and fiscally irresponsible government.

Bailing out 1MDB may be worth it if the move helps pull Malaysia further into China’s orbit, and away from the West. But the larger problem with such a strategy remains: so long as political incentives drive China’s investment decisions more than sound risk assessment, Beijing will continue to suffer periodic headaches from its unreliable partners.

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  • Kevin

    These schemes often come to grief when the investor thinks they are purchasing political good will while also making a prudent economic investments. (Calpers and other state run investors in the US seem to have becone adept at losing money this way.) Governments should be clear about whether they are pursuing economic UC or political objectives when they “invest” money abroad, confusion about what they are doing hurts both objectives in the longer run.

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