Friday, June 19, 2009

Strategic aspects of the Malaysian steel policy review

This may sound like a boring topic best left to excite the people in the Chambers or Commerce and Industry. It probably is, though it shouldn't be.

There are strategic issues that underlie the steel policy review which is said to have surprised analysts. Unlike the analysts I am not surprised. And, I'll tell you why.

The PM's trip to China
It is a follow through from the Prime Minister's successful trip to China recently. While the spin in the media was mostly about the living link between Tun Razak's historic breakthrough trip to Mao's China in 1974 Najib's recent visit was clearly about notifying China that Malaysia is a strategic Southeast Asian trading partner that China can tap into.

China has been made to feel unwelcome in the Anglo-Saxon countries like the U.S. (e.g. CNOOC's rebuff last year) and Australia (Chinalco's rebuff in recent months). Malaysia is in a good position to tell China that it is very welcome in Malaysia.

Malaysia's foreign investment policies are being liberalised. The liberalisation is clearly targeted at countries like China.

China as a solid foreign investor and trade partner to offset the weakening U.S. trade demand
In time, with hard work and bridge-building (couldn't resist the pun for Penang and Johor scenarios), China will start pouring in its large surplus into Malaysia. This will offset the lowering trade with the U.S. and Europe in the forthcoming 12 months.

The U.S. and Europe can expect green shoots to turn into yellowing weed (to borrow an expression from Nouriel Roubini). Unemployment is still mounting in the U.S. and Europe. The economic implosion will take some time to run its course.

So, China will be an excellent entity to offset the lower trade.

China will also be a good source of foreign investment into Malaysia.

Malaysia will be an excellent gateway for China into Southeast Asia. Apart from Singapore, Malaysia has a population that will make Chinese investors feel at home just as we have made Taiwanese investors feel at home for so many years.

Steel policy liberalisation in context
Given the above excursus, the steel liberalisation makes eminent sense since it will be a clear gesture to China that its export of steel to Malaysia will be welcomed.

While the response from China remains to be seen in the coming months, it is clear that in certain respects the Malaysian economic strategies remain sound despite political challenges.

A solid and positive response from China to Malaysia's overtures will put the Najib Administration in a good position as positive trade with China and Chinese foreign investment pouring into Malaysia may significantly cushion the economic blow from the reduced trade with the U.S. and Europe.

I know that in previous posts months ago I have expressed scepticism about the long term benefits of an aggressive foreign investment policy since this policy has created a false comfort zone that kept Malaysia as a low labour cost jurisdiction. This policy is in the process of being rectified, I hope. I still maintain the view.

In the short term, however, given the prospects of negative GDP growth, Najib's overtures to China is an astute and necessary strategy. I believe that the prioritisation of policies is sound and appropriate.

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