The United States has overtaken China as Malaysia’s top investor in manufacturing, government figures show, amid a trade war between the world’s two largest economies that is diverting investments into Southeast Asia.

China has been the leading investor in Malaysia during the last three years but the United States surpassed the Asian giant in the first half of 2019, according to latest approved data on foreign direct investment (FDI) in the manufacturing sector released by the Malaysian finance ministry this week.

Finance Minister Lim Guan Eng said on Monday that investment in Malaysian manufacturing had jumped more than 74 percent to 33.1 billion ringgit (U.S. $7.9 billion) from January to June compared to the same period last year with nearly a third, or 11.7 billion ringgit (U.S. $2.8 billion), coming from the United States.

This made it “the biggest source of approved manufacturing FDI during the period,” Lim said in a statement.

China was the second biggest foreign source with 4.8 billion ringgit (U.S. 1.1 billion) in investments, he said without providing comparative figures for the two countries.

But the Malaysian Investment Development Authority (MIDA) last week released figures showing that during the January-June period in 2018, American investments amounted to U.S. $762.1 million while Chinese investments totaled U.S. $4.75 billion.

No reasons were provided by the government for the investment shift but some experts think it may be a short-term development, attributing it to the ongoing U.S.-China trade war.

U.S. President Donald Trump has been levying tariffs on a variety of Chinese goods, while China has been retaliating with trade barriers of its own.

In a bid to avert the soaring tariffs imposed on Beijing, some companies are relocating parts of their production lines from China to Southeast Asia, such as Vietnam and Malaysia, reports have said.

“China has lost FDI [foreign direct investment] as production for export to the U.S. has been affected by those tariffs,” University of Malaya economist Rajah Rasiah told BenarNews.

He noted that investments to the United States had risen primarily through the relocation of firms out of China to circumvent tariffs.

“However, to me this is a short-term phenomenon. In the long run, once the costs of production among these firms rise owing to higher tariffs and U.S. wages, it will undermine exports as they would become expensive," he said.

Rasiah felt that unless the United States returned to its former tariff regime, “it will face a recession and with that an eventual fall in FDI. Meanwhile, China would be exporting to other countries, and through other countries to the U.S.”

A changing investment picture

In a report last week, the Malaysian central bank acknowledged “early signs of several global electrical and electronics manufacturers indicating intentions to relocate operations to Malaysia” but said this was “unlikely to offset the adverse impact from unresolved trade conflicts in the immediate term given the long lead time required to reorient supply chains.”

The United States has traditionally been a big investor in Malaysia’s electrical and electronic industries and the government expects to cash in on the U.S.-China trade dispute to draw more investments.

“We expect U.S. investments in the E&E [electrical and electronics] sector in Malaysia to continue to grow because of the strong local ecosystem, particularly in [the state of] Penang, and also partly due to decisions made by investors as a result of the strains in the relationship between the U.S. and China,” Ong Kian Ming, the deputy minister of international trade and industry, told BenarNews.

On the other hand, there is some uncertainty about overseas investments from China, whose economy is slowing down and as Beijing braces for another round of stiff tariffs to be imposed by the United States, beginning in September.

International credit rating agency Moody’s Investors Service warned last week that China’s overseas investment growth would likely slow or even decline in the next few years.
Moody’s said Chinese infrastructure companies would be more selective when investing in projects outside the country, according to a U.S. news channel CNBC.

Ada Li, senior credit officer at Moody’s, said projects under China’s One Belt, One Road (OBOR) initiative would also likely slow in the next few years. She noted that the country’s foreign direct investments for the first half of 2019 had only grown 0.1 percent from the year before.

Additionally, Chinese state-owned companies, which typically participate in such projects, are now shifting their investment focus away from overseas markets and back to the mainland, she said, according to CNBC.

Malaysia is among key participants in Beijing’s OBOR initiative that stretches to 70 countries. It aims to build a 21st-century Silk Road by connecting the countries through networks of railways, bridges and ports, linking China with Africa, Europe and Southeast Asia.

Despite the uncertainty, Finance Minister Lim indicated in a speech earlier this month that Chinese investment interest had not been waning.

“We are now seeing more investors and officials from China making inquiries and prospecting for new opportunities and new areas for collaboration in Malaysia,” he said at a forum on the One Belt, One Road initiative in Kuala Lumpur.