Chinese Investments In Malaysia: Managing Risks And Disputes

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It was full house at the Belt And Road Session of the 31st Law Association For Asia And The Pacific (LAWASIA) “A New Era For South East Asia” Conference in Siem Reap, Cambodia on 3 November 2018.

As Co Chair of the LAWASIA Belt And Road Committee, I presented a paper on “Chinese Investments In Malaysia: Managing Risks And Disputes” and covered 3 main points. Below is an excerpt of my lecture.

CHINESE INVESTMENTS IN MALAYSIA: MANAGING RISKS AND DISPUTES

For the past 8 years, Malaysia has been in the international limelight, often for the wrong reasons. The happiest moment came on May 9 this year, when the Malaysian people changed the ruling government through general elections that were peaceful and largely trouble free.

1. Malaysia supports the Belt And Road Initiative and continues to welcome Chinese investments in Malaysia.

Prime Minister Tun Dr Mahathir and also designated Prime Minister successor Datuk Seri Anwar Ibrahim both visited China recently, underlining the importance and value Malaysia places on its relationship with China which goes back 2000 years.

There are three waterways that are crucial to international trade: Panama Canal and Suez Canal which are man made, and the Straits of Malacca, the natural waterway managed by the littoral countries of Malaysia, Indonesia and Singapore.

It is for this reason that Malaysia, alongside neighbours Singapore and Indonesia, will continue to attract the interest of foreign investors and international traders.

Malaysia also has very attractive principal hub incentives for foreign investors from the US, Europe, Japan and China to locate regional headquarters and management services in Malaysia. Many of the biggest multinational corporations in the world including those from China (including Alibaba who we assisted to acquire Lazada’s Malaysian operations) operate out of Malaysia today as a hub for its regional business activities in South East Asia.

For Chinese investors, a large segment of the Malaysian workforce is effectively bilingual in Chinese and English. Chinese is spoken, and the large Chinese community in Malaysia makes it easy for Chinese managers to adjust to expatriate life in Malaysia due to food and cultural similarities. Chinese schools in Malaysia has trained generations of Malaysians in the Chinese language and today even other Malaysian communities and foreigners send their children to the Chinese schools to learn Chinese.

In the current US China Trade War, Malaysian factories located in China have moved part of their production and supply chains back to Malaysia. Malaysia was a manufacturing powerhouse in the 1990s prior to China joining WTO.

Today, the reverse flow caused by the ongoing US China trade war, will see China based factories moving to cheaper South East Asian countries such as Vietnam, Philippines, Myanmar, Indonesia and Malaysia.

Due to Malaysia’s financial mismanagement under past governments, the currency is at historic lows and Malaysia’s good manufacturing and transportation infrastructure and connectivity make it an attractive location for Chinese and other foreign investors to locate production centers and supply chains in Malaysia.

Even if the US China Trade War is resolved hopefully by the end of this year, China will continue to need to manage the trade deficit in the US and cope with higher costs of production in China. Malaysia is a good relocation choice for Chinese owned factories and continues to welcome Chinese and other foreign investments to our country.

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2. Preparation and a strong legal and compliance culture are the best forms of risk management for Chinese investors.

Last November, I attended a session where Chinese Go Out Companies shared their experience in Asia. 2 of them had many disputes and the other 2 had none. I was curious and wanted to know why.

After hearing their experiences, I reached the conclusion that those who had no disputes have prepared well before they went abroad, consulting China and host country lawyers, undertaking market research and local partner due diligence and consulting Big 4 international accounting firms on tax and other issues.

So the key to the success of Chinese Go Out Companies is good and adequate preparation, plus a strong legal and compliance culture.

In Malaysia, Alibaba is undertaking major Digital Free Trade Zone and electronic World Trade Platform Projects. They had no issues with the new Malaysian Government, the key difference is Alibaba is a public listed company with a strong legal and compliance culture. Likewise, Ali Cloud and other subsidiaries like Ant Financial operating in Malaysia are preparing for IPOs and have similarly strong Management, Legal and Compliance cultures.

3. The Belt And Road Initiative is a paradox: the more successful the projects, the fewer the disputes.

More disputes will mean the failure of the Belt And Road Projects.

According to economist Marc Galanter and his theory of Legal Realism, the parties to a dispute are the best people to resolve the disputes.

They are the people who knew all the facts such as why the project was started, what they hoped to achieve, what circumstances have changed and what the cause of the dispute is.

Lawyers, mediators, arbitrators, judges, consultants and other advisers are of necessity third parties with limited knowledge of the facts and can only apply general principles to resolve the dispute.

We are all lawyers from Belt and Road  countries, it is in the interest of our countries that Belt and Road Projects are successful so that it can bring connectivity and economic development, create jobs and eradicate poverty in our respective countries.

So it is important for all of us to work together with parties in Belt And Road Projects to avoid and minimize disputes, promote settlements and if these initiatives fail, to use international mediation as a last resort.

I am mindful that I am also a lawyer, but I must say that lawyers suffer from a conflict of interest in dispute management. The more the disputes, the more business and fees for the lawyers.

But this will result in a destruction of value – parties to a projects come together to make profits. If projects fail, employees will lose their jobs and countries will fail to develop the economy- there is great destruction of economic value in disputes.

It is not in our interests to have disputes.

I used to say that litigation and arbitration services are like funeral services for which we earn a burial fee. It is a one off fee.

It is also in the interest of lawyers together with the rest of the community to encourage successful Belt And Road Projects. Clients and projects can continue to exist and create more businesses and demand for legal services in a healthy economy. That is good for lawyers.

So let us work together to avoid and minimize disputes and help parties to Belt And Projects succeed.

#law #disputeresolution #lawfirms #beltandroad #FDI #mediation #arbitration #disputesettlement #China #Malaysia #ASEAN #supplychain #projectfinance #infrastructure

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