AS THE US-China trade war roils global markets, Malaysia has emerged as a key beneficiary in the South-East Asia. Chinese companies, eager to sidestep escalating US tariffs, are increasingly choosing Malaysia as a strategic base for manufacturing, research and market access, driving a surge in foreign direct investment (FDI).
This influx presents Malaysia with a significant growth opportunity, but also a challenge: How to harness new capital to build domestic capacity without sacrificing economic autonomy.
The trade war has accelerated the “China +1” strategy, prompting Chinese firms to diversify production beyond their borders to mitigate tariff risks and geopolitical uncertainty. Malaysia’s skilled workforce, competitive labour costs, strategic location and stable political environment have made it an appealing alternative for industries like manufacturing, semiconductors, artificial intelligence (AI) and green technology.
While Chinese investment in Malaysia is not new, recent years have seen a dramatic increase. Between 2018 and 2023, China’s FDI stock in Malaysia jumped from US$8.39 billion (RM35.92 billion) to US$13.48 billion, with annual inflows ranging from US$1.1 billion to US$1.6 billion. In the first three quarters of 2024 alone, FDI from China reached US$6.3 billion, a 39% year-on-year (YoY) rise.
This surge is especially evident in high-tech manufacturing hubs such as Penang and the Klang Valley. According to real estate advisory firm JLL, Malaysia attracted US$21 billion in Chinese commitments for its semiconductor industry and US$10 billion for data centres and digital infrastructure, respectively, between 2019 and 2023.
These investments could significantly boost Malaysia’s industrial capabilities and create high-skilled jobs, supporting its decades-long goal of transitioning to a high-income economy. However, rapid inflows also raise concerns about overdependence on Chinese investment and the erosion of economic autonomy.
Striking the right balance is crucial: Malaysia must welcome Chinese capital and know-how while ensuring that investment leads to meaningful technology transfer, local capacity building and sustainable development. Without this, the country risks becoming a mere “assembly hub” for Chinese goods, vulnerable to external shocks and limited in value creation, especially in sectors like solar panels and AI data centres where Malaysia risks being confined to low-value roles.
Anwar Ibrahim administration’s Madani Economy framework provides a foundation for this balancing act. With policies such as the New Industrial Master Plan 2030 (NIMP) and the National Energy Transition Roadmap (NETR), the government is prioritising high-tech and green industries, areas where Chinese FDI is increasingly concentrated.
The National Semiconductor Strategy (NSS), launched in 2024 with a US$5 billion budget allocation, aims to move Malaysia up the value chain from merely attracting investment to becoming a leading chip designer and manufacturer.
Alongside economic reforms, the government has pledged to strengthen governance and regulatory oversight to protect national interests. This includes promoting joint ventures that ensure local participation, enforcing intellectual property protections and monitoring investments in strategic sectors to prevent undue foreign dominance.
To maximise benefits, Malaysia must foster genuine partnerships that facilitate technology and skills transfer, building local expertise and innovation. Clear guidelines on foreign ownership in critical industries and effective use of special economic zones can attract high-value investments without enabling tariff circumvention.
Moreover, Malaysia’s appeal goes beyond tariff avoidance. Its geopolitical neutrality, skilled multilingual workforce and ASEAN membership offer advantages over regional competitors. Participation in multiple free trade agreements provides companies with tariff-free access to a market of over 600 million consumers.
Navigating great power rivalry is as much a part of Malaysia’s strategy as economic development. By refusing to take sides, the country keeps trade and investment channels open with both the US and China. This approach allows Malaysia to benefit from trade diversions and attract FDI from both powers, even as deeper ties with China in high-tech sectors may complicate relations with Washington.
Remaining a neutral and reliable partner is central to Malaysia’s foreign policy. Trans- parent regulations, intellectual property (IP) protections and diversified investment partners can help reassure the US, while efforts to promote open, rules-based trade and deepen regional integration through its chairmanship of ASEAN this year reinforce Malaysia’s value as a strategic partner.
Ultimately, Malaysia’s success in striking the right balance will determine the extent to which it can harness the benefits of Chinese FDI without undermining its goal of long-term economic resilience or compromising the success of its policy of great power neutrality.
- Brian R Braun, Founder and principal of Strategic Insights Asia.
- This article first appeared in The Malaysian Reserve weekly print edition
The post Balancing Chinese investment with economic growth, sovereignty appeared first on The Malaysian Reserve.
