Tuesday, 7 February 2017

Mahathir, Forest City and Foreign Direct Investment

Much have been talked about China's investment in Malaysia specifically in Johor.

READ MALAY VERSION HERE: Mahathir, Forest City dan Pelaburan Asing

I'm not particularly interested in the recent "debate" between HRH Sultan Johor and Tun Mahathir on Forest City that is developed by China's property developer Country Garden Holdings Company Ltd, but I feel the need to comment on some of the points raised by Tun Mahathir.

While Tun was writing based on a report by Bloomberg, I will try my best to answer Tun based on statistics and data that are publicly available.

6. What did Bloomberg say in its report on Nov 22 last year? It said that a China Chinese company will build Forest City in J.B. which can accommodate 700,000. It went on to say that plane loads of China Chinese are being flown in to view the man-sized model (with pictures) and they have and will buy most of the properties in Forest City. 
7. I doubt if many Johore Malays and Chinese are buying or going to buy these apartments. There just aren’t that many Malaysians to buy all these properties. 
8. Bloomberg, in the same report mentioned 60 other development similar to Forest City, and these are also being sold to mainland Chinese.

Evidently Forest City wasn't intended to be sold to the Malaysians, as indicated and reported several times by international news outlet:

The Straits Times - 23 January 2016

South China Morning Post - 22 January 2016

That doesn't mean there are no Malaysians or Johoreans who could afford to buy condominium units at Forest City because according to Country Garden chief strategy officer, Malaysian buyers made up of 30% who bought units at Country Garden's first project in Iskandar i.e. Country Garden Danga Bay:

The Straits Times - 23 January 2016

Furthermore data published by the National Property Information Center (NAPIC) showed that there were 5,196 residential property transactions for properties in the price range below RM1,000,000 in Johor in the last quarter alone compared to just 133 transactions for properties above RM1,000,000 in price:

Johor Property Sales Data: NAPIC

In almost every quarter, more than 90% property transactions were made up of those residential properties priced below RM1,000,000 which means locals or Malaysians have no problem buying and selling properties in Johor in non-luxury segment.

How do we know that only locals buy and sell residential properties in the price range of RM1,000,000 million and below? Because under the Section 433B National Land Code 1965 and set by the Johor state authorities that foreigners are only allowed to purchase properties that are priced RM1 million and above, whether it's a direct purchase from developers or sub-sales from individual/company:

Acquisition of Property by Foreign Interests: Pentadbiran Tanah Johor

Tun Mahathir's attempt to portray as if the locals are priced out of the property market because of Forest City and similar projects in Johor is inaccurate and misleading.

"10. There will be in all more than a million foreigners living in J.B Forest City and the 60 other development. These new places will not become a foreign country, but it will have an inordinate percentage of foreign people. If they stay long enough they will be entitled to become citizens of Malaysia."

Again Tun Mahathir made a simplistic assumption on the premise that all properties developed at Forest City and other projects in Iskandar will be purchased 100% by foreigners and all the purchasers will migrate to Malaysia and live here for more than 10 years.

Why 10 years? Because for a non-Malaysian citizen to apply to be a Malaysian citizen by naturalisation, there are strict requirements that must be met by the applicant before the government can grant a certificate of naturalisation to that applicant. The requirements are as follows:

How to Become A Citizen of Malaysia: MMY2H

Do people honestly think that the government will simply grant citizenship to foreigners without thorough vetting and without imposing strict requirements? 

Not all foreign property purchasers will reside or live in Malaysia. China's investors mainly buy foreign properties to diversify their investments abroad as reported by The Guardian: "China's Passion for Foreign Property" and the South China Morning Post: "Buyers Shrug as China Tightens Forex Rules for Overseas Property Binge".

According to the Current Population Estimates (2016) Malaysia published by the Department of Statistics Malaysia (DOSM), Johor's total population in 2016 is 3.65 million of which 3.305 million are Malaysian citizens and 350,000 are non-Malaysian citizens:

Current Population Estimates 2016: DOSM

According to the Population Projections, Malaysia, (2010-2040) by the Department of Statistics, by 2035, Johor's total population will be 4.603 million of which 90.8% or 4.18 million are Malaysian citizens and 423 thousands are non-Malaysian citizens.

By 2035, on which year that Forest City development is expected to be fully completed, DOSM projects that Johor's population will increase by nearly 1 million from 3.65 million in 2016 to 4.603 million in 2035 of which non-Malaysian citizens population in Johor is projected to increase by 70 thousands:
Population Projections, Malaysia (2010-2040): DOSM
An increase of 70 thousands non-Malaysian citizens population in Johor is a meager amount compared to total increase of close to a million Malaysian citizens population in Johor in 20 years time.

This is just a projection or an estimate by DOSM using widely used methods i.e. exponential growth rate and linear interpolation using a statistical software developed by the US Agency for International Development (USAID).

But who would you rather trust? Wild assumptions by Tun Mahathir based on report by media outlet or our own accredited statistics agency whose data and statistics are used by planners and policymakers, public and private sectors for planning and implementation of national development for long term and as well as study and research purposes:

Population Quick Info: DOSM

"11. Yes, I promoted Foreign Direct Investment. But it was not about buying land in Malaysia, developing them and selling them to foreigners, who will stay there.
12. FDI is about investment in the manufacturing industry. Malaysian companies will construct the building and Malaysians will work in the industries. They will acquire skills and start their own manufacturing business."

Tun Mahathir deliberately highlighted the investment in real estate sector and left out the fact that manufacturing sector was still the biggest recipient of foreign direct investment (FDI) in 2015: 
FDI by Sector: Statistics of FDI in Malaysia, 2015: DOSM

Furthermore Johor has been the biggest recipient of domestic and foreign investments in manufacturing sector since 2014. It received RM17.9 billion capital investment for new manufacturing projects in 2014 and RM29.5 billion in 2015: 

Approved Manufacturing Projects by State 2014 - 2015: MIDA

For the first 9 months of 2016, Johor received RM18.1 billion of capital investments in manufacturing sector, the biggest among other states.

It makes you wonder why Tun never mentioned all these multi-billion capital investments in manufacturing sector in Johor that have been pouring in for the past few years and focusing on property development in Johor as if it's the only industry that's received foreign investment.

Manufacturing is still among the biggest sector and most important in Malaysia. It constituted 22.8% of total Malaysia's GDP in 2015 while real estate sector constituted only 4.3% of Malaysia's GDP in 2015.

Manufacturing sector also employed 2.32 million workers in 2015 of which 80% is local workers.

Labour Force Survey Report Malaysia, 2015: DOSM

Why Tun didn't mention any of this is anyone's guess.

"14. But when foreigners buy land, there is not even an inflow of capital. Much of the money will be borrowed locally. And they can do their business with their own banks.
15. Whatever foreign companies earn will be expatriated, will result in outflow of capital. When the scheme is introduced wherein you can buy property in China and get one flat or house free in Malaysia, no profit will be made in Malaysia – therefore no taxes will be paid to the Malaysian Government."

When foreign companies invest in Malaysia, they will earn income or profit here and repatriation of that income back to their country (where their headquarters located) is recorded as Investment Income Paid Abroad in the current account (CA) which is a component of balance of payments (BoP).

On the flip side, when resident/Malaysian companies invest abroad, they will also earn income/profit and repatriation of that income back to Malaysia is recorded as Investment Income Received from Abroad also in the CA which is a component of BoP.

Malaysia's Current Account, Balance of Payment: DOSM

From the third quarter of 2016 Balance of Payment report showed that in the last quarter (July - September 2016), Malaysian companies earned (credits) RM8.134 billion from abroad and foreign companies earned (debits) RM17.603 billion from Malaysia which essentially means in term of investment income flows, Malaysia has a negative net investment income from abroad (investment income received from abroad minus investment income paid abroad) which essentially means money was flowing out (in term of investment income) more than it's flowing in to Malaysia.

It has been true since many decades ago, actually since before we gained independence and Malaysia was formed, net investment income from abroad has always been negative which means foreign companies earned more in Malaysia than Malaysian companies earned from abroad which practically means more investment income flowed out from Malaysia than it flowed in.

Below is the chart of Malaysia's net investment income since 1981 until 2015:

Malaysia's Net Investment Income: EPU

That's just the absolute amount, if we compare net investment income relative to Malaysia's economic output or GDP, under Tun M as PM, investment income deficit reached as high as 8.1% in 2000:

Malaysia's Investment Income Deficit

Of course there was no complaint of capital outflow from Tun Mahathir back then.

I would like to add that under Tun Mahathir as Prime Minister, in the early ’90s, government removed some restrictions on short-term capital inflows (portfolio inflows), foreign shareholdings in local brokerage firms and bank lending to non-residents.

Apart from the removal of those restrictions, government also announced a wide-ranging package of incentives to attract foreign fund managers and institutional investors to promote Kuala Lumpur as a global financial center.
Capital market liberalization in the early 1990s was followed by a significant increase in the net inflow of portfolio investment:

Short Term Portfolio Investment Flow
Foreign investments in equity increased rapidly which then fuelled a stock market boom.
In the mid 90's the Kuala Lumpur Stock Exchange (KLSE) with a market capitalization around US$200 billion, was the third largest stock market in the Asian and Pacific region after those in Tokyo and Hong Kong.
The market cap of KLSE at that time was 3 times bigger than Malaysia’s GDP.
The stock market boom changed the way the domestic banks operate as lending for equity market activities became a major source of credit expansion.
Poor corporate governance and weakness in the financial sector were the two main fundamental sources of economic vulnerability at that time.

In the first half of 90s, outstanding domestic credits in the banking system rose substantially, with a heavy exposure to the property sector which include share trading and real estate sector.
The annual growth of bank credit to private sector increased by 12% during 1990–1994 to over 26% during 1994–1996.
Outstanding credit to GDP ratio rose from an average of 85% during 1985–1989 to 120% in 1994 and then to over 160% in 1996 when the financial crisis started in mid 1997 which was the highest credit expansion among the economies of East Asia.
By the end of 1996, total credit to property sector accounted for around 55% of total outstanding bank credit.
The high exposure to the property sector further weakened the financial position of the banking system.

IMF published a working paper called Lending Booms, Real Estate Bubbles and the Asian Crisis which examined the linkage between lending booms, property price cycles and financial crisis across the range of East Asian countries including Malaysia.
The IMF paper stated that there's a massive capital inflows into Malaysia's property sector which led to severe property price bubble preceding the Asian Financial Crisis in the late 90s:
Lending Booms, Real Estate Bubbles and The Asian Crisis: IMF
Under whose watch this happened? Under whose tenure as Prime Minister that Malaysia liberalised its economy and financial sector so much that it created a severe property and stock price bubble that led to the biggest financial crisis in the region that we've ever since?
Unlike Tun, the current Prime Minister actually introduced fiscal measures to stem excessive speculation in property sector.
In Budget 2013, Najib Razak proactively revised the real property gain tax (RPGT) rate from 0% to up to 15%:
Budget 2013 Speech: MOF

He further announced more measures in Budget 2014 by revising the RPGT rate from up to 15% to 30%, increasing the minimum property purchase price for foreign buyers from RM500,000 to RM1 million, promoting transparency among housing developers and banning developers from implementing the developers bearing interest scheme (DIBS):

Budget 2014 Speech: MOF

Not to mention that Bank Negara introduced its own measures in 2013 to promote a sound and sustainable household sector especially in property sector by introducing maximum tenure for financing of property purchase:

Measures to Further Promote a Sound and Sustainable Household Sector: Bank Negara Malaysia
This is how responsible the current administration is compared to the administration under Tun Mahathir as Prime Minister.

And last but not least, Forest City is not a project that is developed 100% by China's company. It's developed by a joint venture between Country Garden Holdings Ltd and a local company Esplanade Danga 88 Sdn Bhd which is also an associate company of Kumpulan Prasarana Rakyat Johor (KPRJ), a wholly-owned state government of Johor company:

It's factually incorrect for Tun to say that Johoreans won't benefit from the development of Forest City.

When will Tun stop this nonsense scaremongering? 

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