Part 2 of Local Politics & FDI

 

/[7/20, 10:32] Meta AI: Gunabalan Musings and Travails

China is now sitting on roughly 4.5 trillion in excess savings after the property slowdown. The usual western commentary goes straight to ghost cities and says they built too much.

That misses the point.

The intervention was deliberate.

National house prices have come down to affordable levels. The glut was never in Beijing, Shanghai, Shenzhen or Guangzhou where the jobs are.

Those urban cores have not deflated and likely will not, because that is where productivity and wages are concentrated.

What deflated was the speculative building in third and fourth tier cities that relied on land sales to fund local governments. That model needed to end.

The savings did not come from nowhere. They are the result of two decades of state-backed production, export surpluses and capital deepening.

Factories became more automated, logistics became tighter, and real wages rose. Productivity gains turned into savings because households had few other places to put money with confidence. Property became the default investment.

It functioned as pension, speculation and store of value all at once. When that door closed, the money pooled in banks and on balance sheets.

Two policy links are missing if this capital is to be used well. The first is a land value tax on the urban cores.

Taxing the unimproved value of land in the most productive cities would fund local services without relying on land sales and would discourage hoarding of prime locations. The second is a stable investment vehicle for the public, something like a national pension or sovereign wealth fund with retail access.

Right now people want property because there is no other asset that feels safe and long term. Give them an alternative with decent returns and not tied to one city block, and much of that demand will shift.

The best way to think about the excess savings and the export surplus is through a simple metaphor.

There are two paths. One is the black hole. Savings get recycled into buying trophy assets overseas, prime London, prime New York, prime Sydney.

That pulls capital out, bids up expensive housing elsewhere, and does nothing for workers at home. It also accelerates involution because money chases scarce status assets instead of productive ones.

The other is the stars. Savings get exported as productive infrastructure. Ports in Indonesia, rail in Africa, energy grids in Pakistan, factories in Mexico.

That raises productivity abroad, which raises real wages abroad, which creates new customers who can afford Chinese goods and services. It turns the export surplus into demand for exports, instead of into asset inflation.

We are already seeing the stars path play out in Southeast Asia. Chinese capital is building nickel processing in Sulawesi, EV battery plants, the Jakarta-Bandung high speed rail.

In Malaysia there are data centers in Johor, the East Coast Rail Link, and new EV and battery manufacturing.

In Thailand and Vietnam there is a wave of relocation as Chinese firms set up final assembly to serve ASEAN and to get around tariffs. Singapore is becoming the hub for routing funds and corporate headquarters.

The logic is straightforward- Export capital, build infrastructure and factories, raise local productivity, and then sell into a market with higher wages.

There is also the other side. Some capital still goes into property in Kuala Lumpur, Bangkok and Johor Bahru, and into digital platforms that capture consumer surplus.

That is the rentier black hole tendency. It does not raise productivity as much. It just bids up existing assets.

Because domestic consumption in China remains weak, there is also a large export of overcapacity. EVs, solar panels, steel and batteries are coming out cheap.

For Southeast Asia this is both an opportunity and a pressure. We get affordable green technology, but local industries can be wiped out without safeguards.

If current trends hold, Southeast Asia becomes China’s demand sink and production platform. China cannot rely only on its own consumers to absorb factory output, so it has to build demand abroad. We are close, young, and have an infrastructure deficit.

The logical result is more Chinese funded infrastructure, more Chinese factories in the region, and more trade settled in renminbi. Growth here becomes partly tied to how much China can deploy capital here.

*The capital flow will also split in two. Productive flows will go to Indonesia, Vietnam, Malaysia and Thailand in the form of factories, ports and power*.

*Financial flows will go to Singapore and prime property in capital cities.*

The risk is that the balance tips too far toward asset buying if governments do not have projects ready to absorb the money.

To manage this, countries will have to get sharper. Take the infrastructure foreign direct investment, but require local content and technology transfer.

Put tariffs or quotas on dumped goods to protect strategic industries.

Regulate property buying so it does not make housing unaffordable. If nothing is done, the region gets the factories and the jobs, but also hollowed out SMEs and asset inflation.

China’s savings glut is not abstract. It is already landing as rail lines, factories and solar panels. The next decade will likely bring a lot of infrastructure and industrialization funded by those savings.

In return China gets new markets and places to relocate production. It works only if the region steers the money toward productive projects and not just speculation.

That means negotiating hard on terms, protecting key industries, and making sure productivity gains actually translate into higher local wages.

The property slowdown forced the question. The savings glut is the answer waiting for direction. Build the investment vehicles, tax land in the cores, and export infrastructure instead of speculation. That is how 4.5 trillion stops being idle and starts becoming productive.

[7/20, 10:36] Gunabalan Musings and Travails

If we use the Japanese investment wave from the 1980s to early 2000s as the template, we can map what Chinese capital and the 4.5 trillion savings glut will likely do to Malaysia in real terms. The sequence is not instant. It comes in layers, from price effects first to culture last.

The first and lowest hanging fruit is imported deflation. In the 1980s Japanese TVs, cars, cameras and electronics came in cheap and forced local prices down while raising quality.

The same is happening now with Chinese goods. EVs, solar panels, batteries, home appliances, machinery, and e-commerce goods are arriving at prices 20 to 40 percent below previous imports.

For Malaysian households that means the cost of living for tradable goods falls. For local manufacturers who compete directly, margins get squeezed immediately. The difference this time is scale. Japan exported finished products. China is exporting entire supply chains.

The second effect is factory relocation and jobs, similar to the Japanese auto parts, E and E and steel plants in Shah Alam, Penang and Johor in the 1990s.

The Japanese came to serve ASEAN and to get around trade barriers. The Chinese are coming for the same reasons, plus to offload overcapacity.

We can expect more assembly plants for EVs, batteries, solar, drones and consumer electronics in Johor, Perak and Kedah. These jobs will be mid-skill, with technicians, engineers and operators hired locally.

Wages will be better than gig work but will be benchmarked to regional rates, so they will not automatically pull the whole wage curve up.

The Japanese model gave us supplier ecosystems over 15 years. The Chinese model will move faster but will also demand local partners to meet content rules.

The third effect is on balance sheets. In the Japanese era, Malaysian companies learned project management, quality control and export discipline by becoming vendors to Sony, Panasonic, Toyota. With China the balance sheet impact is bigger and faster because the capital is state-backed and patient. Expect more joint ventures where Chinese firms bring 70 percent of the capex for data centers, ports, industrial parks and energy projects. Malaysian GLCs and private firms will co-invest, borrow, and put these assets on their books.

That means higher leverage but also higher asset values. For banks, loan books will tilt toward infrastructure and manufacturing linked to China.

For households, EPF and unit trusts will likely get exposure through these projects, similar to how Japanese FDI indirectly flowed into pensions via listed suppliers.

The fourth effect is the seep into daily business:

In the 1980s and 90s it was Japanese management style, 5S, kaizen, and long-term supplier contracts that entered Malaysian factories.

With China it is digital payments, logistics platforms, and speed. TikTok Shop, Shein, Temu and Chinese logistics firms are already changing how retail works in Klang Valley and JB.

On the ground, contractors, landlords and SMEs will start pricing deals in RMB, using Chinese banks for trade finance, and hiring

Mandarin-speaking staff not as a preference but as a requirement to deal with principals.

That is exactly what happened with Japanese in the 90s when speaking Japanese and understanding keiretsu relations became a career asset.

The fifth and deeper effect is cultural and social. Japanese investment did not change Malaysian food or language much, but it did change expectations around punctuality, quality, and industrial discipline. Chinese money will have a broader footprint because the community link is already here.

Expect more Chinese schools expanding, more media and content flowing in, more tourism and property ownership patterns in JB and KL, and more business networks that run through family and dialect associations.

This is not colonization. It is what happens when capital and people move together over a decade.

The Japanese never brought large numbers of migrants.  The Chinese investment wave will, through engineers, managers, and downstream entrepreneurs.

The end state if involution in China is not stopped is this. Malaysia becomes a node in China’s external circulation system.

We supply land, labor, and a legal system to host production that cannot be done profitably in China anymore.

In return we get cheaper goods, more infrastructure, and industrial jobs.

But we also import China’s competition intensity. Bidding wars for contracts, faster product cycles, and pressure on local SMEs to upgrade or die.

If China instead flips to the stars path and exports infrastructure that raises productivity abroad, then Malaysia benefits twice.

We get the investment, and we also get new customers in Indonesia, Vietnam and Africa who can afford to buy Malaysian services and components that are plugged into Chinese supply chains.

In real terms, a Malaysian household in 2030 will feel it as this. Cheaper EV and solar on the roof.

A job in a Chinese battery plant that pays RM4,000 to RM6,000. A mortgage that includes a Chinese bank.

A boss who expects WeChat and Mandarin in meetings.

And a local kopitiam that takes Alipay as routinely as it takes Touch n Go.

That is the Japanese playbook, but faster, bigger, and with culture attached.

The question for Malaysia is whether we use the window to move up the value chain like we did with Japanese E and E, or whether we just become the showroom and assembly floor.