Foreign Affairs
Malaysia’s Strategic Tightrope: Balancing the China Dilemma

Malaysia is facing a critical geopolitical dilemma as it navigates its strategic balancing act between its Western allies and China. The nation has maintained a nuanced foreign policy, aiming to maintain strong ties with both Western nations and Asian neighbors, particularly China.

This has allowed Malaysia to benefit from economic cooperation, investment, and technology transfer. However, managing these diverse relationships presents challenges and dilemmas. Malaysia must carefully manage its relationships with both China and the Western powers to maintain its strategic autonomy, assert its interests in the South China Sea, engage in regional diplomacy, and pursue economic opportunities while safeguarding its sovereignty. The path Malaysia chooses will shape its future and contribute to the evolving dynamics of Southeast Asia and the global order.

Malaysia is grappling with the decision to end its reliance on China or align more closely with the West for long-term economic assurance. The argument that the next century of growth will be in Asia, led by the Chinese Economic Century, remains flawed and risky. The West and the US have lost their economic lustre, leaving only the capacity as security providers.

Efforts to diversify Malaysia’s economic and investment basket have been slow, with Germany leading the drive in Europe, the UK, and the US. Malaysia’s deep economic and investment overtures to Beijing reflect the inability to see beyond China as the main economic lifeline, both as an investment inflow and export destination. China’s property sector, the largest asset class in the world, accounts for more than half of global new home sales and home building.

The property crisis in China is a result of a larger internal structural and systemic economic fault, including the exodus of top technological firms, an ageing population, shrinking workforce, unemployment, and inability to create sustaining internal capacity without Western support.

The West’s liberal economic model has been characterized by a lack of flexibility and long-term political opening, leading to an imbalance in the co-creator and complementing factors needed for a sustaining and dependable economic and trade model.

This imbalance is exacerbated by China’s decision to double the import of Malaysia’s palm oil, driven by geostrategic factors such as food security, stockpiling, and resource resilience. This move is crucial for both China and Malaysia, as Malaysia is set to assume the ASEAN Chairmanship in 2025.

China remains pragmatic in securing its energy needs and interests, sending a message to the EU that its normative standards may trap it. This is in response to the Global Biofuels Alliance move and the India-Middle East-Europe Economic Corridor IMEC, which seek to rival the BRI in the region and continue Beijing’s strategy of cultivating resource needs from countries still reliant on the Chinese economy.

Kuala Lumpur is a crucial location for Beijing to maintain dominance and avoid West attempts to distance it from China. Beijing believes that Malaysia’s ability to reduce economic dependence will provide greater opportunities for security discourse and options. As China faces pressure from the West’s technological and economic embargo and sanctions, it will need to expand its fallback and second-front assurances for economic and resource resilience.

Malaysia needs to shift its long-term economic model from a China-centric one to reduce its vulnerability to potential Chinese economic decline. The nation’s traditional dependence on China or Asean is outdated and hinders its economic growth. The US and India have the most favorable demographic and future economic advantages, with New Delhi already in Malaysia’s top ten trading partners and projected to be the world’s third-largest economic power by 2028.

These countries have their best years and decades ahead in terms of economic sustainability parameters, demographic advantage, and scientific and high technology capacity. In 2022, the US, Singapore, and Japan contributed the highest net inflows of foreign direct investments to Malaysia, demonstrating a values-based economic model.

Malaysia’s economic transformation towards a high-income nation is characterized by high technology progress, a values-based approach, resilient technology transfer, a green and digital economy, and responsible climate, labor, and human rights responsibilities.

Malaysia must shift its business, trade, and economic climate away from low-value economic multiplier chains and create new frontiers with trusted high impact, durable, and tangible economic spillover impacts on the people.

Malaysia’s government is implementing a pragmatic diplomacy strategy to maximize economic benefits from its relationship with China while maintaining ASEAN’s principles of peace, stability, and cooperation. Prime Minister Anwar Ibrahim has emphasized this approach, balancing economic pragmatism with geopolitical caution.

Malaysia has been diversifying its economic partners, strengthening ties with traditional allies, exploring new markets, and welcoming foreign investments. However, the future of Malaysia’s strategic tightrope walk will be challenging as the global balance of power evolves.

Balancing Economic Prosperity and National Sovereignty Amid China’s Dependency

Malaysia’s economic dependence on China is a major factor in its China dilemma. As Malaysia’s largest trading partner, China has significantly boosted bilateral economic ties over the past decade. Chinese investments in Malaysia’s infrastructure, particularly through the Belt and Road Initiative, have contributed to development and growth.

However, this economic interdependence raises concerns about national sovereignty. Critics argue that Malaysia risks becoming overly reliant on China, potentially compromising its ability to assert sovereignty on issues like territorial disputes in the South China Sea. In 2018, several Chinese-backed infrastructure projects were suspended due to concerns over debt and sovereignty.

Malaysia’s economic fortunes are closely linked to China’s rapid rise as a global economic powerhouse, with bilateral trade reaching over $100 billion annually. Chinese investments have also significantly boosted Malaysia’s infrastructure development, creating jobs but also raising concerns over sovereignty and environmental impact.

Geopolitical Implications

Malaysia’s strategic location in Southeast Asia complicates its China dilemma due to geopolitical rivalry and China’s assertiveness in the South China Sea. Malaysia’s stance on territorial disputes affects relations with China and the US.

To maintain balance, Malaysia has sought to engage with regional forums like ASEAN, but pressure to align more closely with Washington or Beijing is intensifying as great powers compete for influence.

Diversifying Partnerships

Malaysia has implemented the “Look East” policy, focusing on strengthening ties with Japan and South Korea to reduce its reliance on China and capitalize on East Asian countries’ advanced technology and economic opportunities.

The country has also strengthened its ties with the United States, particularly in defense and security cooperation, through joint military exercises and diplomatic dialogues, despite the country’s robust economic ties with China.

Navigating Geopolitical Waters

Malaysia, a member of the Association of Southeast Asian Nations (ASEAN), is aware of its geopolitical position in Southeast Asia, particularly in the South China Sea. Despite China’s expansive claims, Malaysia has been cautious in its approach to these territorial disputes, advocating for peaceful resolution through dialogue and adherence to international law. This diplomatic stance has helped Malaysia maintain its strategic neutrality while being an active member of ASEAN.

Managing Internal and External Pressures

Malaysia faces a complex challenge in balancing its economic interests with geopolitical concerns, with domestic politics adding to the complexity. Leaders must cater to a diverse population, including ethnic Malays, Chinese, Indians, and indigenous groups.

Managing public opinion on the China issue is a tightrope act, with politicians balancing national interests and not appearing confrontational. Externally, Malaysia faces pressure from the United States, Japan, and Australia, who seek to strengthen their relationships with Malaysia through military cooperation, economic incentives, and support in Southeast Asia.

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