KUALA LUMPUR -- The Malaysian government has stopped work on three Chinese-led projects, including one regarded as the flagship for China's Belt and Road Initiative, ahead of high-level talks with Beijing.
Prime Minister Mahathir Mohamad is expected to lead a government delegation to Beijing, likely in mid-August, as Kuala Lumpur figures out how to service loans taken from China to finance the costly infrastructure projects. A source close to the government said the suspensions are meant to show Kuala Lumpur’s seriousness about these projects and to pressure Beijing ahead of talks.
The Malaysian government has been investigating whether the three projects are linked to the 1MDB scandal, for which former Prime Minister Najib Razak was arrested and charged earlier this week.
A stop-work order was issued to state-controlled China Communications Construction, the main contractor of the 688km East Coast Rail Link. The Chinese company said on Wednesday the suspension was regrettable as work had been progressing well.
Malaysia's finance ministry revealed on Tuesday that the actual construction cost for the projects should be 66.78 billion ringgit ($16.5 billion), and not 55 billion ringgit as announced by the previous government. The discrepancy was due to three additional contracts signed to expand the project, according to the ministry.
After adding the cost of finance -- 85% of which comes from the Export-Import Bank of China -- the total cost of the project would hit 80.92 billion ringgit.
Without a "drastic price reduction" by CCC, the project will not be financially and economically feasible, the ministry said.
Two gas pipeline projects being built by China Petroleum Pipeline Bureau, a unit of state-owned China National Petroleum Corporation, have also been suspended, according to local media.
The two projects, financed by the same Chinese bank, shared similar contract terms as the rail link, in which payments to contractors did not reflect the amount of work done. The Malaysian government deemed the terms unfavorable, hence the high-level talks with Beijing to resolve the issue.
The suspensions came after a delegation from the State Council of China, the country's cabinet, met on Monday with the Malaysian government's Group of Eminent Persons.
Ma Jiantang, Secretary of Party Leadership Group, told reporters that the meeting was meant to explore "bilateral trade and economic development."
Chinese money flowed into Malaysia during the Najib administration amid a crisis involving the spiraling debt of 1MDB, a state fund established to promote economic development. A Chinese state-owned energy company rescued the fund in 2015, and Malaysia returned the favor by accelerating approval of Belt and Road infrastructure projects.
Analysts expect Beijing, which regards the rail link as its flagship Belt and Road project, to accommodate Kuala Lumpur's request to renegotiate.
"It is in Beijing's interest to work with Mahathir to trim project costs in a way that enables both governments to save face, for example by shortening the route or changing financing terms," said Peter Mumford of Eurasia Group, a risk advisor in Singapore.