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Malaysia in transition

Mahathir builds new order and fresh boundaries a month after victory

Malaysia's relationship with China comes into focus as leader tackles corruption

Malaysian Prime Minister Mahathir Mohamad is set to revisit infrastructure deals signed by the previous government with Beijing. (Getty Images)

KUALA LUMPUR -- A month after sweeping into power, Prime Minister Mahathir Mohamad has moved swiftly to dismantle the legacy of scandal left by the previous government and build a new order for Malaysia, but in doing so, he faces enemies new and old.

As his government sinks its teeth into corruption probes, meeting election promises and reducing debt, it has also ventured into unfamiliar territory: wrestling with an increasingly influential China.

This is 92-year-old Mahathir's second stint as prime minister, but in the 15 years he was away, China has progressed considerably. Beijing is now the dominant player in the region and Mahathir must face down the Chinese leadership as he tries to regain control of a number of infrastructure projects in Malaysia.

Of primary importance are two gas pipelines worth 9.4 billion ringgit ($2.4 billion) being constructed by Chinese entities under agreements made by former Prime Minister Najib Razak. Mahathir says the contract terms that dictate payment upon reaching certain timelines are not favorable to Malaysia -- the Ministry of Finance says 88% of the contract value has been paid out despite only 13% of the work having been completed a year into a three-year plan.

Mahathir is now planning to send Minister of Finance Lim Guan Eng, in a delegation that includes anti-graft officials, to Beijing to renegotiate the contracts, but there are already signs that he will face resistance. Chinese media criticized Kuala Lumpur's intention to renegotiate and demanded the government honor the original deals.

Whereas Mahathir's previous government relied on Japan and the U.S., especially for inward investment, under Najib, Malaysia began to lean increasingly toward China.

Unfavorable contracts with Chinese companies are just one of several issues Mahathir has to contend with. He won the election on an anti-graft ticket, declaring that he would get to the root of the problems at scandal-tainted state fund 1Malaysia Development Berhad.

Among the first things he did upon taking office was to remove top officials at the chief prosecutor's office and anti-corruption agencies, both seen as standing in the way of investigations into the state fund.

The authorities moved quickly to raid residential properties linked to Najib in relation to $4.5 billion that have allegedly been siphoned from the fund he established. The police found cash worth $29 million in several currencies as well as luxury goods. Najib and his wife Rosmah Mansor were also questioned.

The newly appointed Attorney General Tommy Thomas is now working with his counterparts abroad to bring back money taken from 1MDB. The appointments of Thomas and Lim mark the first time in decades that the two key government positions are held by non-Malays.

The previous ruling party, the United Malays National Organization, was dominated by ethnic Malays, leading to ill feeling among the country's Chinese and Indian minorities.

These appointments, as well as leadership changes at state-linked institutions, display an intention to prioritize governance over politics. 

"This will further demonstrate to the public that [Mahathir] is cleaning house and trying to address concerns over transparency," said Peter Mumford of risk consultancy Eurasia Group.

Lim, an accountant by training and formerly chief minister in the industrial state of Penang, has prioritized cutting government spending after the discovery of documents related to 1MDB and abnormal payments to contractors from China working on the infrastructure projects.

He also redefined national debt to include liabilities and lease payments. This resulted in the revelation that the government had debts of 1.083 trillion ringgit, or 80% of gross domestic product, substantially higher than the 50.8% claimed by the previous government.

Mahathir also faces the challenge of working with a cabinet of politicians from various coalition parties, many of whom were in opposition during his previous stint as prime minister.

As such, he has set up a Council of Eminent Persons to advise the government on institutional reforms.

Some market observers have praised the make-up of the new cabinet itself as being comprised of "qualified and learned" professionals. "These will induce confidence among the foreign investors," said Kenny Yee, head of research at brokerage Rakuten Trade.

As a first step, the five-member council, which includes former Finance Minister Daim Zainuddin, central bank Governor Zeti Aziz and Hong Kong-based tycoon Robert Kuok, declared politicians sitting on the board of state-linked companies should step down. This is to free these companies from political influence and to ensure they are managed by professionals.

Mahathir will need the support of his government if he is to ensure Malaysia is a credible force on the world stage. Apart from China, he will also need to form a fresh relationship with Singapore.

Mahathir's decision to cancel the planned Kuala Lumpur-Singapore high speed rail project has already upset Prime Minister Lee Hsien Loong's government. In addition, Mahathir indicated plans to enlarge two islets near Singapore, raising the possibility of reopening a territorial dispute. 

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