China Offered to Bail Out Troubled Malaysian Fund in Return for Deals

The secret discussions show how China uses its  financial clout to corrupt and bolster its position overseas
By Tom Wright and Bradley Hope

Former Malaysian Prime Minister Najib Razak, third from left, in 2017 reviewed a model of a railway China agreed to build. Current PM Mahathir Mohamad has suspended the $16 billion project. 

Senior Chinese leaders offered in 2016 to help bail out a Malaysian government fund at the center of a swelling, multibillion-dollar graft scandal, according to minutes from a series of previously undisclosed meetings reviewed by The Wall Street Journal.
Chinese officials told visiting Malaysians that China would use its influence to try to get the U.S. and other countries to drop their probes of allegations that allies of then-Prime Minister Najib Razak and others plundered the fund known as 1MDB, the minutes show.
The Chinese also offered to bug the homes and offices of Journal reporters in Hong Kong who were investigating the fund, to learn who was leaking information to them, according to the minutes.
In return, Malaysia offered lucrative stakes in railway and pipeline projects for China’s One Belt, One Road program of building infrastructure abroad. 

Within months, Najib signed $34 billion of rail, pipeline and other deals with Chinese state companies, to be funded by Chinese banks and built by Chinese workers.
Najib also embarked on secret talks with China’s leadership to let Chinese navy ships dock at two Malaysian ports, say two people familiar with the discussions. 

Such permission would have been a significant concession to Beijing, which seeks greater influence across contested waters of the South China Sea, but it didn’t come to pass.

A Journal examination of the China-Malaysia projects, based on documents and interviews with current and former Malaysian officials, offers one of the most detailed accounts to date of the political forces at work behind China’s Belt and Road program, a signature initiative of building ports, railways, roads and pipelines in some 70 countries to generate trade and business for Chinese companies.
China is using the program to increase its sway over developing nations and trap them in debt while advancing its military aims. 

Several countries, including Pakistan and the Maldives, have been reviewing One Belt, One Road projects amid allegations deals unfairly advanced Beijing’s interests.
American national-security officials regard the Chinese efforts in Malaysia as Beijing’s most ambitious attempt to leverage the program for geostrategic gain, said a person familiar with U.S. discussions.
Minutes of the Chinese-Malaysian meetings say that although the projects’ purposes were political in nature—to shore up Najib’s government, settle the 1MDB debts and deepen Chinese influence in Malaysia—it was imperative the public see them as market-driven.
The Chinese government information office didn’t respond to requests for comment.

China's Infrastructure Initiative
China is building and financing a global network of trade and energy links to fill gaps in existing infrastructure spanning Asia, Europe and Africa.

China has said its Belt and Road projects promote development that benefits all sides. 

Nations wouldn’t welcome the program as they have if it carried the financial and geopolitical risks asserted by critics, China’s Foreign Ministry has said. 

It has denied that money in the program was used to help bail out the troubled Malaysian fund.
Documents reviewed by the Journal show Malaysian officials suggested that the infrastructure projects be financed at above-market values, generating excess cash for other needs. 

Investigators from the current Malaysian government, which replaced Najib’s last year, believe some of the money helped Najib finance his political activities and cover maturing debts of 1MDB, a fund he set up in 2009 to finance local development.
Najib was aware of the 2016 Malaysian-Chinese meetings, according to people familiar with them. Asked about them, the former prime minister issued a statement saying the rail project would have brought tens of thousands of jobs to Malaysia and stating that under his leadership, the country experienced nine years of continuous economic growth.
Current Malaysian Prime Minister Mahathir Mohamad, who ousted Najib in an election last May, put the Chinese projects on hold. 

Malaysia has since charged Najib with crimes that include money laundering and breach of trust. 

He has denied them, is free on bail and faces trial this year.

A tunnel approach for a $16 billion rail link China agreed to build for Malaysia. The government that took over in Malaysia last year has suspended the project. 

Malaysia, rich in natural resources and on a sea lane, is a prized ally in the U.S.-China contest for influence in Asia. 

The U.S. once courted Najib as it sought alliances in the region.
In July 2015, the Journal reported that $681 million of funds originating with 1MDB, known formally as 1Malaysia Development Bhd., had flowed into Najib’s personal bank accounts. 

Najib’s office said the money was a gift from a Saudi Arabian it didn’t identify and said most of it was eventually returned.
The U.S. Justice Department began investigating. 

Its probe damaged Washington’s relationship with Najib, according to officials in both countries, helping drive Malaysia into Beijing’s arms.
By 2016, Najib was in a bind because the fund had borrowed $13 billion it couldn’t repay. 

He turned to Jho Low—a Malaysian financier the U.S. Justice Department has alleged was the mastermind of a multibillion-dollar theft of 1MDB funds—to negotiate with China to resolve the crisis, according to current and former Malaysian officials.

Jho Low, a central figure in a multibillion-dollar scandal at a Malaysian development fund. A now-suspended Chinese ‘Belt and Road’ project in Malaysia has partially bailed out the fund’s debts. 

Mr. Low faces criminal charges in both Malaysia and the U.S. related to the Malaysian fund. 

The U.S. has sought to seize hundreds of millions of dollars of his luxury assets acquired with the fund’s money. 

He is a fugitive, living in China under Beijing’s protection. 

Chinese officials have declined to comment on that.
Low drew up plans for Malaysian meetings with Chinese officials and attended some of them, according to current and former Malaysian officials.
Malaysia’s new government discovered the documents, including minutes from Chinese-Malaysian meetings over several months, after a sweep of Najib’s offices, according to members of the government. 

The Journal, besides reviewing the documents, interviewed people in position to know the events, among them a former official of Najib’s government.
The documents describe a plan proposed by Malaysian officials for Chinese state companies to build two large projects with funding from Chinese banks. 

One, the $16 billion East Coast Rail Link, would be a railway across Malaysia connecting two ports. 

The other, the $2.5 billion Trans Sabah Gas Pipeline, would be built partly on Malaysia’s portion of the island of Borneo.
Armed with a bottomless supply of cash, Jho Low staged the ultimate extravaganza. Leonardo DiCaprio, Pharrell Williams, Swizz Beatz, Jho Low, Paris Hilton, Kim Kardashian and Kanye West all attended the Vegas party.

The projects would provide “above market profitability” to the Chinese state companies, the documents say. 

The rail link should have cost only $7.25 billion to build, according to an earlier estimate by a Malaysian consultancy, said a Malaysian government official.
The public must believe “all initiatives are market driven for the mutual benefit of both countries,” Chinese official Xiao Yaqing said at a meeting on June 28, 2016, according to minutes of the meeting.
Xiao, chairman of China’s State-owned Assets Supervision and Administration Commission, said he had “cancelled all his key engagements in Beijing to attend” because the matter “has been approved by President Xi Jinping, Premier Li Keqiang” and another senior Chinese official, according to the minutes. 

Xiao’s agency didn’t respond to requests for comment.
At a meeting the next day, Sun Lijun, then head of China’s domestic-security force, confirmed that China’s government was surveilling the Journal in Hong Kong at Malaysia’s request, including “full scale residence/office/device tapping, computer/phone/web data retrieval, and full operational surveillance,” according to a Malaysian summary of that meeting.

Chinese official Xiao Yaqing, seen at a June summit of China’s ‘Belt and Road’ program of building infrastructure in dozens of other countries. 

“Sun says that they will establish all links that WSJ HK has with Malaysia-related individuals and will hand over the wealth of data to Malaysia through ‘back-channels’ once everything is ready,” the summary reads. 

“It is then up to Malaysia to do the necessary.”
It couldn’t be determined whether China provided any information. 

Sun didn’t respond to requests for comment.
A Journal spokesman said, “We employ experts on security and cybersecurity to work with our journalists on safety and secure communications with sources of information.”

Derailed
Malaysia has frozen work on a Chinese-funded project called the East Coast Rail Link amid concerns its cost was inflated to divert money to help pay off the debts of 1Malaysia Development Bhd.
Sun also promised to use China’s “leverage on other nations” to get the U.S. and others to drop their 1MDB investigations, according to the meeting summary. 

The Justice Department investigation continued, as did probes in Singapore, Switzerland and elsewhere.
At one meeting, the Malaysians asked that the Chinese state company that would build the rail link assume $4.78 billion of 1MDB debt, a plan they hoped China would agree to quickly “due to the time sensitive nature” of the fund’s debts, according to the documents.
A Chinese negotiator worried this would be “very noticeable” in financial statements of the builder, China Communications Construction Co. , meeting minutes show.
A month later, the Malaysians proposed that Chinese state companies instead make payments that would “indirectly be used to repay 1MDB debt,” according to meeting minutes.
Notes of a discussion on Sept. 22, 2016, say the sides agreed to move ahead with the infrastructure deals even though “they may not have strong project financials.”
Participants needn’t “waste time studying the actual project financials to see if they can sustain the debt etc.,” because Malaysia’s government backed the deals for "strategic" reasons, the documents say.
Notes from that meeting said Malaysia was working to enhance bilateral ties, citing support Najib voiced for China’s position in the South China Sea during a regional summit in Laos.
Two months later, Najib went to Beijing and signed the deals. 

Together with other projects, they made Malaysia the second-biggest recipient of One Belt, One Road funding after Pakistan.
Money was flowing by the middle of 2017 as the Export-Import Bank of China issued the first loans. By fall the bank had paid out 80% of the $2.5 billion pledged to state-owned China Petroleum Pipeline Bureau to build the pipeline, although little work had been done, according to Malaysian officials.

Malaysian Prime Minister Mahathir Mohamad, center, suspended plans for Chinese companies to build costly rail and pipeline projects in Malaysia. 

When campaigning for Malaysian parliamentary elections began early in 2018, China openly sided with Najib, its ambassador at one point campaigning with members of his coalition. 

Against the odds, Mr. Mahathir, a prominent former prime minister then 92 years old, led his coalition to victory.
Now, Mr. Mahathir is negotiating with Beijing over potential new terms for the railroad project and seeking the return of Low. 

Excavators for the rail projects are idle, and workers’ quarters are vacant. 

Mr. Mahathir is expected to cancel the pipeline deal.

Malaysian Traitor

How Najib Sold Out Malaysia To China

www.sarawakreport.org
Najib Razak Arrested Again Over Corruption Scandal

The latest six charges laid against Najib and his trusty lieutenant, Treasury secretary-general Irwan Serigar Abdullah, confirm again how blatantly the previous prime minister and his government were prepared to lie in the face of evidence leaked by brave insiders to Sarawak Report.
They also lay bare the outrageous extent to which this former prime minister was willing to rob his country, laying it open to China's economic imperialism, which was naturally quite happy to suck Malaysia into a vortex of debt that would have destroyed the nation’s independence.
Way back in 2016 Sarawak Report published the secret agreement that lay behind the sudden inflation of the budget for the East Coast Rail Link to double the original proposed cost of $30 billion. 

 The secret deal with China’s state owned CCCC (China Communications Construction Company) laid out in clear detail (including amounts and dates) how the repayments on the debts owed by 1MDB were to be concealed through those inflated figures.
The Chinese government had effectively sanctioned the corrupt deal, offering Najib a 2% loan and various up-front incentives, after Najib’s fugitive proxy Jho Low negotiated the terms on his behalf in Beijing. 

 And, as the figures showed, Jho Low had taken care to look after himself in the process by apparently using the deal to also purchase shares in companies he had originally bought using 1MDB’s stolen money.
Najib and his ministers, including then Public Works Minister, Sarawak’s Fadillah Yusof, (brother to Bustari Yusof a key collaborator of Najib and major recipient of money diverted from 1MDB) at the time claimed the story was nonsense.
However, within just a few weeks Najib had visited China and signed off on exactly the contract terms that had been leaked to Sarawak Report for the now massively expensive rail project that experts predicted could never be made profitable for Malaysia.
And this week, following the new charges, the Malaysian Anti-Corruption Commission (MACC) has made clear that the money to fund 1MDB’s loan repayments was being funneled through the project just as had been detailed in Sarawak Report. 

Inflated pipe line projects in East Malaysia were being employed for the same reason.
Further tranches of cash were also purloined using an inflated and unnecessary land purchase by Bank Negara (no wonder the long standing deputy resigned) and, perhaps even more disgracefully, a straight theft of money from BRIM, the payments supposed to alleviate the lives of the poor.

Given Najib had time and again boasted of BRIM to curry votes it is particularly notable that he was prepared to raid it to pay for the massive hole in 1MDB accounts punctured by thefts used, for example, to pay for his step-son’s production of Wolf of Wall Street and Jho Low’s massive payment of a quarter of a billion dollars for one of the world’s largest super-yachts.
And yet today the ex-PM’s lawyer (Shafee Abdullah, himself facing charges for laundering money from 1MDB and failing to declare tax) called the charges laughable. 

Few others in Malaysia are likely to see the joke as the sums officially misappropriated by Najib have leapt by a further staggering RM6.6 BILLION to RM 9 BILLION (and rising).

The list of 1MDB repayments agreed with amounts and dates as part of the secret deal with CCCC to inflate the cost of the ECRL by over 100%

China's Corruption Trap

The 'great-grandmother of all scandals' comes to China
By Michael Bristow
Former Malaysian Prime Minister Najib Razak arrives in court in Kuala Lumpur, following his arrest in connection with a corruption probe.

There is a new twist in the multi-billion-dollar financial scandal surrounding the Malaysian investment fund 1MDB -- Chinese involvement.
Malaysia's new government -- which took office only in May -- has suspended three major construction projects with Chinese firms.
A senior ministry official told the BBC that two of the contracts, for pipelines, were used to launder money for Malaysia's previous administration, led by the former Prime Minister, Najib Razak.
These allegations open a new front in the inquiries into 1MDB, which is already being investigated in the US, Switzerland and Singapore.
The finance ministry's accusations also represent a sharp change in mood in Malaysia towards China since Najib lost power.
The investigations into 1MDB are being led by Malaysia's finance ministry, housed in a vast curved building in Putrajaya, a purpose-built town to the south of Kuala Lumpur that has been the country's administrative capital for the past two decades.
Until the election in May, Tony Pua was an opposition MP who spent much of his time talking about 1MDB, which he calls "the great grandmother of all scandals".
He made a series of scurrilous videos about the fund and its connection to Najib.

The 1 Malaysia Development Berhad development company is being investigated in Malaysia, Singapore, Switzerland and the US

But now Mr Pua's party is in government and he has been employed as a special officer to the finance minister to look through the mountains of documentation related to 1MDB.
Before his current job, he said he worked with "dribs and drabs" of information about 1MDB -- but not any more. 

"Now, anything you ask for, the tap opens like a beer barrel," he told the BBC in an interview at the ministry.
Mr Pua said the new administration had been astounded by what it had found, which has extended the scope of what was previously known about 1MDB, including links to Chinese firms.
Earlier this month (6 July), the ministry announced that it had suspended three big contracts with Chinese companies.
Two of those are pipeline schemes worth a combined total of $2.3bn (£1.7bn).
The ministry's new leaders were staggered to discover that 88% of the contract cost had been paid to the Chinese company in charge, China Petroleum Pipeline Bureau -- but only 13% of the work had been completed.
Mr Pua said building work had not even started; only consultancy studies had so far been completed.
"The entire project smelt like a scam. [There were] clearly elements of money laundering taking place," he said.
"We were giving money out -- to a Chinese company -- and this money is being funnelled to parties related to the previous administration."

MP Tony Pua is leading the investigation into 1MDB

He said the ministry believes the money was being used to cover debts linked to 1MDB, which he said now stand at more than $12bn.
Emails to China Petroleum Pipeline Bureau about Mr Pua's allegations went unanswered.
Malaysia's finance ministry has also suspended the East Coast Rail Link, which is being built by the China Communications Construction Company.
It said the cost of the rail line, $20bn, "must be reduced significantly to make it viable financially".
The ministry said the suspension of both the pipelines and the rail link were not directed at "any particular country", but the new government in Malaysia has certainly brought about a change in attitude to links with China.Mahatir Mohamad was sworn in as Malaysia's prime minister on 10 May

The new Prime Minister, Mahathir Mohamad, is expected to travel to China in August, when some of the suspended contracts could be renegotiated.
But China's nationalistic newspaper, the Global Times, warned Malaysia not to push China too hard.
"If [Mr] Mahathir wants to review big projects agreed to by his predecessor and damage the interests of Chinese companies, those companies have the right to claim compensation," it said in an editorial.
Professor Terence Gomez, of the University of Malaya, said the close relationship between China and Malaysia that existed until the election in May was convenient to both sides.
He said Najib needed foreign investment and China under Xi Jinping was willing to provide it as part of its Belt and Road initiative, which aims to connect the country with the rest of Asia and beyond.
"Two state governments, both authoritarian regimes, both single dominant party states with powerful leaders, had an agenda," he said.
Professor Gomez said there was still an appetite in the new government for Chinese money. 

He pointed out that one of the first businessmen to visit Mr Mahathir when he took office was the Chinese e-commerce billionaire, Jack Ma.
But some Chinese investments now appear to be tangled up with the investigations into 1MDB, which was set up by Najib Razak in 2009 to spur economic development in Malaysia.
So far, the only tangible product of 1MDB is a new business district being built in central Kuala Lumpur called Tun Razak Exchange, where workmen swelter in the heat to complete the project.

The Tun Razak Exchange - the only tangible project built with 1MDB funding.

As for Najib, earlier this month he appeared in Kuala Lumpur High Court charged with four counts of stealing a total of $10m from a subsidiary of 1MDB.
He denies the charges, and has always denied other wrongdoing related to the investment fund. 

Many of the hundreds of people who turned up for his first court appearance were supporters who believe in the former prime minister's innocence.
But the current government has already indicated that these are just the first of what could be many more charges brought against Najib.
"We have to pace ourselves to make sure we do not miss anything," said Tony Pua, before heading back to his office to study more documents.

I am a poor lonesome cowboy

US "allies" in Southeast Asia are defecting to China

By Richard Javad Heydarian

"We will be signing many new agreements and understandings that will elevate the relationship between our two nations to even greater heights," declared Malaysian Prime Minister Najib Razak shortly before his visit to Beijing. 

Moving a step further, the Southeast Asian leader praised how China has "created benefits not just for the people of our two nations but also for regional stability and harmony".
Days later, Najib warned the West against "lectur[ing] countries they once exploited on how to conduct their own internal affairs today".
Najib's statements were particularly significant, because they came shortly after the Philippines' controversial leader, Rodrigo Duterte, visited Beijing, where he uttered a similar mixture of praises for his hosts and derision for the West, specifically the United States.
Both the Philippines and Malaysia have also signed defence agreements with China.
Manila is exploring a 25-year military deal, which allows it to purchase Chinese weapons on favourable terms, while Kuala Lumpur has bought patrol naval vessels from Beijing.
This is a dramatic turn of events, since not only are the Philippines and Malaysia considered as staunch strategic partners of the West, but they have also been caught in bitter territorial disputes with China, which has rapidly expanded its footprint across the South China Sea.
Put together, Najib's and Duterte's back-to-back visits to Beijing have provoked panic in western capitals, with observers causally warning about a wave of defections among traditional western partners now pivoting to China.
There are fears that the United States' regional allies are falling like a domino to an ascending strategic rival, China, which has offered billions of dollars in economic incentives and (supposedly) shunned criticising domestic policies of neighbouring states.
A more careful analysis, however, reveals that what we are instead witnessing is an ephemeral strategic recalibration among US allies, who seek to maximise their own room for manoeuvre.

Show me the money
Several factors explain the Philippines' and Malaysia's strategic flirtation with China. 

The most obvious one is, of course, commercial considerations. 

Throughout the past decade, China has emerged as the top-trading partner of almost all regional states, with the exception of the Philippines ( PDF ).
But the Asian juggernaut lagged behind traditional powers such as Japan and the US in terms of direct investments. 

In recent years, however, China has been rapidly closing the gap , offering large-scale investments across its near abroad.

By successfully setting up the Asian Infrastructure Investment Bank (AIIB), and relishing the dramatic expansion of state-affiliated telecommunication companies like Huawei and ZTE, Beijing is in a strong position to become the key source of infrastructure development across Asia.
Rising labour costs at home also mean that Chinese manufacturers are in search of cheaper alternatives in Southeast Asia. 

During their visit to China, Duterte and Najib secured tens of billions of dollars in investment pledges and business deals.
China is expected to help build a $15bn high-speed rail project linking Kuala Lumpur and Singapore. It could also play a critical role in revamping the infrastructure landscape in Mindanao, Duterte's home island, which has been racked by insurgency and massive poverty in recent decades.

Seeking compromise
There were also realpolitik considerations. 

Uncertain about the US' commitment to the region, both Manila and Kuala Lumpur have sought direct engagement rather than confrontation with the Asian powerhouse over the South China Sea disputes.
Duterte has barely mentioned the Philippines' landmark arbitration case against China in either international forums or during his recent state visit to China. 

A negotiated compromise like joint development agreements in contested waters seems to be the preference of both the Philippines and Malaysia.

Xi Jinping, right, gestures to Rodrigo Duterte during a review of the guard of honour during a welcome ceremony.

A more important but less discussed factor is the US' criticism of Duterte's war on drugs and Najib's potential problem with judicial authorities over a massive corruption scandal . 

Both leaders are trying to deter further American criticism by dangling the "China card".
This way, they hope to expand their room for manoeuvre and avoid any legal and political showdown with Washington.
Their tirades against Western interference and imperialism as well as praise for China, which has kept quite on their domestic politics, should precisely be understood in this context.

Shifting sands
The Philippines' and Malaysia's tilt to China isn't necessarily an indication of failure in the US' pivot to Asia strategy. 

If anything, recent developments may represent a temporary coup de grace after a series of strategic setbacks for China.
In recent years, China has painfully watched former allies such as Myanmar and Communist sisters like Vietnam rebuild ties with the West, particularly the US.
In fact, Hanoi is considering buying advanced weaponry from and conducting more regular joint exercises with the US, which has regained potential access to Cam Ranh Bay for the first time since the end of Cold War.
In fact, even staunch Chinese allies such as Laos have begun to reconsider their lopsided relationship with China in favour of better ties with the West.
Meanwhile, after an initial spark, China's relations with South Korea have rapidly soured in recent years. 

Even relations with North Korea, an erstwhile ally, is in the doldrums .
To Beijing's consternation, Taiwan is now under the rule of a pro-Independence party, which is doubling down on defence cooperation with the US, Japan and other Western partners.
In short, strategic alignments in Asia seem to be more fluid than unidirectional. 

Much will also depend on the result of the US election and the policies of the new incoming administration.
For now, China can at least relish revived relations with bitter rivals in the South China Sea.

Philippines’ Deal With China Pokes a Hole in U.S. Strategy

By JANE PERLEZ

A fishing boat returning to the Philippine city of Subic from Scarborough Shoal on Tuesday. The Philippines has persuaded China to allow its fishermen access to the shoal, signaling a softening of its alliance with the United States. 

BEIJING — For years, the United States and its allies have struggled to contain China’s ambitions in the South China Sea, even as China steadily seeded the waters with artificial islands and military installations.
Now, by cutting its own deal with China, the Philippines has suddenly changed the calculus, persuading the Chinese to let its fishermen operate around a disputed shoal but setting a worrying precedent for the United States and its hopes of using regional alliances to preserve its place as the dominant power in the Pacific.
What had been a fairly united front against China’s expanding maritime claims, stretching from Japan to Malaysia, now has a gap in the southeast corner where the Philippines lies, and could soon have another at the southwestern end, where Malaysia is making noises about shifting its alliances.
In both cases, resentment over what is seen as American interference in unrelated problems — a wave of extrajudicial killings in the Philippines and a huge financial scandal in Malaysia — may have contributed to the shift.
Rodrigo Duterte is angry with the United States over its criticism of his lethal antidrug program, in which 2,000 people have been killed, mostly by the police.
In Washington, the ranking Democrat on the Senate Foreign Relations Committee, Benjamin L. Cardin of Maryland, has vowed to block any sale of assault rifles to the Philippine police, Senate aides confirmed Tuesday. 

While President Obama has criticized extrajudicial killings in the Philippines, blocking weapons sales would be the first concrete American sanction, and would probably only drive the Philippines further from the United States.
Malaysia’s prime minister, Najib Razak, is angry over a money-laundering investigation into what the United States Justice Department says is more than $1 billion looted from a Malaysian government fund by Mr. Najib’s relatives, friends and associates. 

Mr. Najib is in Beijing this week shopping for military hardware.
“Nobody wants the U.S. to leave the region to China,” said Bilahari Kausikan, ambassador at large for Singapore. 

“But China is using its economic leverage, its geographic position and its lack of interest in human rights to try and change the balance of influence in a region where the vagaries of American politics are now on stark display.”
The deal between China and the Philippines became apparent over the last week with reports that China had begun to allow Philippine fishermen to operate in contested waters in the South China Sea for the first time in four years, rewarding Mr. Duterte for his friendship with Beijing and his coolness toward the United States.
The deal is an informal one, and so far has not been committed to writing, but it seems to give both parties what they want while sidestepping the more contentious issue of sovereignty over Scarborough Shoal, the contested fishing grounds claimed by both China and the Philippines.

A satellite image of Scarborough Shoal, in the South China Sea, last year. The Chinese still control the area around it. 

China has not renounced its claim over the shoal, nor has the Philippines conceded China’s claim. But the Philippines’ main interest in the territory is fish, and it appears to have gotten that, a victory for Duterte and his popular defense of his country’s important fishing industry.
For China, the concession not only shifts an important American ally into its good graces but also brings it at least partly into compliance with a ruling by a tribunal in The Hague on the dispute.
The July ruling, which China rejects, denied Beijing’s claim over most of the South China Sea. China’s Foreign Ministry said on Monday that it remained opposed to the ruling and that the loosening of its four-year blockade of the shoal was a special “arrangement” for Duterte and “has nothing to do with the so-called award.”
Nonetheless, in allowing Philippine fishermen back into the waters around the shoal, China, whether it admits as much or not, was complying with the part of the ruling that dealt with the blockade, according to Paul S. Reichler, the Philippines’ chief counsel in the case.
“China has suddenly decided to act in a manner that, in fact, complies with one aspect of the award,” he said. 

“It is a welcome step in the right direction.”
Because the tribunal did not consider the question of sovereign rights, he said, China is not out of bounds in continuing to claim sovereignty over the shoal, nor would the Philippines be, if it did the same.
“Beijing has played a clever diplomatic hand,” said Ashley Townshend, a research fellow at the United States Studies Center at the University of Sydney in Australia. 

“It’s secured a public relations win by lifting the blockade, without forgoing its sovereignty claims over the shoal or even removing its coast guard vessels.”
For Duterte, who has vowed to scale back relations with the United States, including possibly denying American forces access to five military bases in the Philippines, the deal on Scarborough Shoal came with little cost.
A Philippine official, Representative Harry Roque, who accompanied Duterte on his trip to Beijing two weeks ago, told The Philippine Daily Inquirer that the Chinese had wanted a written document that said the fishermen would be “allowed” or “permitted” to return to Scarborough Shoal, wording that would imply China’s control of the area.
Such wording was “unacceptable,” Mr. Roque said, and so the deal was not put in writing or formally announced.

Duterte with his Chinese counterpart, Xi Jinping, in Beijing last month.

For China there was also little cost. 

The Chinese still control the area around Scarborough Shoal, and it would be tough for the Philippine government to negotiate a full withdrawal of the Chinese from the shoal, an area China has considered turning into an artificial island to create a military base.
Still, China has lost a point of leverage, Mr. Townshend said. 

“Having now lifted the blockade and drawn global attention to the issue, it will be very difficult for Beijing to reinstate the blockade without incurring serious reputational damage and undermining its political rapprochement with Manila,” he said.
The United States, a bystander to the deal, gave it a kind of provisional approval.
Deputy Secretary of State Antony J. Blinken, saying that he had only read reports, said it would be a “positive development” because it showed that China “is acting consistently with the arbitration ruling.”
Even if it portends a potential strategic loss, the agreement also helped reach a goal that the United States has long sought: lowering tensions in an important area of the South China Sea.
For Duterte, the deal caps a two-week period in which he has shown himself to be a “shrewd political animal,” as Mr. Kausikan, the Singaporean ambassador, put it.
In Beijing, Mr. Duterte signed $24 billion in infrastructure projects and loans. 

He left Tokyo last week with the promise of two new vessels for the poorly equipped Philippine Coast Guard and, according to Philippine news reports, $19 billion in investment and loan pledges.
He also won tacit support in both capitals for his campaign against drugs. 

Like the Chinese leadership, Prime Minister Shinzo Abe of Japan did not raise the issue of extrajudicial killings and human rights violations.
How long Duterte can ride out his good relations with China and keep up his threats against the United States is an open question.
At a cabinet meeting next week, Duterte will hear a report from the Philippine Defense Ministry on whether to continue to allow the United States access to the military bases, including one at Palawan, close to Scarborough Shoal.
Duterte has threatened to cancel the 2014 accord that gives Americans access to the bases, a decision that Beijing would welcome. 

Termination of the agreement requires a one-year notice by the Philippine government to the United States.
But the Philippine public remains pro-American and skeptical of China, opinion polls show.
“I think Filipinos are happy to see the fishermen back in their fishing grounds, but I doubt if this meant that there is a significant increase in the 33 percent of Filipinos favorable to China,” said Patricio N. Abinales, a professor of Asian studies at the University of Hawaii.

Domino effect

On Duterte’s heels, Malaysia embraces China 

By Simon Denyer

Protesters gather in support of Philippine President Rodrigo Duterte in Manila on Oct. 21 after he announced that his country would separate itself from U.S. policies.

BEIJING — Malaysia’s prime minister arrived in China on Monday with warm words for his hosts, a thirst for Chinese money and, for the first time, a promise of significantly closer defense ties with the purchase of Chinese naval ­coastal patrol ships.
Najib Razak called himself a “true friend” of China, determined to take their relationship to “new heights” — echoing the pro-China outreach by Rodrigo Duterte two weeks ago when he proclaimed a “separation” from his country’s longtime U.S.-oriented policies.
The twin nods toward China reinforce the regional narrative of American decline and China’s inexorable rise. 

They also showcase Beijing’s apparent ability to buy off rivals for disputed territory in the South China Sea, which China claims as its own despite strong objections from the Pentagon and U.S. allies in the region.
“Malaysia being a South China Sea claimant, and hot on the heels of Duterte, there is an obvious symbolism there,” said Euan Graham, director of the international security program at the Lowy Institute for International Policy in Sydney. 

“In the maritime geopolitical aspect, it’s almost back to dominoes. The Philippines has caved, and Malaysia looks wobbly.”
Malaysia is China’s closest trading partner in Southeast Asia. 

The naval deal will add a significant security element to that relationship, experts said.
Part of the reason is domestic politics. 

Najib was once so close to President Obama that they spent a day playing golf together in Hawaii in 2014. 

But ties to the United States were strained in July after the Justice Department opened an investigation into money laundering at a state investment fund linked to the Malaysian leader. 

That scandal has made Najib unwelcome in Western capitals and depressed Western investment in his country.
Najib will be discussing a high-speed rail project as well as real estate and energy deals with China, but it is his promise to sign “the first significant defense deal” between the two nations that comes as something of a surprise.
“Beggars can’t be choosers,” said James Chin, director of the Asia Institute at the University of Tasmania, noting that Najib ­faces elections next year. 

“It looks very good for domestic purposes if a world power like China is willing to see him and give him five-star treatment, a red-carpet welcome.”
But there are also geopolitical calculations and recalibrations underway around the region, experts say.
Obama’s strategic rebalance, or “pivot,” to Asia has proved a disappointment in many capitals, with the ambitious 12-nation ­Trans-Pacific Partnership trade agreement in deep trouble. ­

China, by contrast, can offer piles of cash and promises of investment without tortuous negotiations or exacting conditions.
The U.S. military has been unable to prevent China’s island reclamation program in the South China Sea, while Duterte’s pledge to throw out U.S. troops has been another blow — even if some experts predict a less dramatic shift in Philippine foreign policy than its erratic president might threaten.
“The pivot hasn’t had the impact it ought to have had,” said Michael Montesano, a senior fellow at the ISEAS-Yusof Ishak Institute in Singapore. 

“It has failed to reduce the doubts that were already there about U.S. staying power and commitment to the region.”
Yet the narrative of U.S. “decline” and Asia’s tilt toward China is only one side of the coin, Montesano and others argue.
China may have power, money and influence, but its aggressive assertion of its South China Sea claims has alienated other ­nations and pushed them toward Washington, said Yang Razali Kassim, a senior fellow at the S. Rajaratnam School of International Studies at Nanyang Technological University in Singapore.
An international tribunal ruled in July that Beijing’s expansive claims to the South China Sea lacked historical basis. 

“If China pushes its weight to press the claims that it has lost,” he said, “Beijing will only carve for itself the image of a menacing emerging giant.”
In fact, few Asian nations want to be in Beijing’s pocket any more than they want to be in Washington’s and would prefer strategic balance between the two powers.
Even for Malaysia, it is too early to say if the latest step is a solid move into China’s camp, said Yin Shao Loong, executive director of Malaysia’s Institut Rakyat.
Malaysia’s military held joint training with Chinese armed forces in 2015, but it has deeper and longer-standing links with the United States and other Western nations.
It has also allowed the U.S. Navy to fly P-8A Poseidon long-range surveillance aircraft from its territory in recent years, to Beijing’s discomfort.
Strategic balance is even more of a priority in Vietnam, which has moved significantly closer to Washington in recent years while being careful not to antagonize Beijing.
In September, Vietnamese Prime Minister Nguyen Xuan Phuc visited Beijing in a bid to boost trade and attract investment.
“Up to that point we were very hesitant,” said a Vietnamese official who was not authorized to be named, explaining that his ­nation did not want to become economically overdependent on China or a dumping ground for inferior products and polluting heavy industries. 

“But we are recalibrating, accepting more of the Chinese economy in Vietnam’s economy — the Chinese are the ones who have money to spend.”
But Vietnam, with domestic public opinion strongly nationalistic, is equally determined not to give way in its dispute with China in the South China Sea.
It is a similarly mixed picture elsewhere.
Thailand’s military-led government is buying three submarines from China, but Indonesia — furious about incursions by Chinese fishing boats into its waters this year — is now considering joint patrols with Australia in the South China Sea, officials said this week, according to the Sydney Morning Herald.

Malaysia's Najib Razak in China, as 1MDB scandal, South China Sea dispute loom over talks

By Nyshka Chandran

Malaysian Prime Minister Najib Razak heads to China this week for a state visit that could further skew Southeast Asian geopolitics in Beijing's favor, a week after Philippine leader Rodrigo Duterte initiated a similar shift.
Najib and a contingent of business executives will be on the mainland from October 31 to November 6, where "many new agreements and understandings" are on the agenda, the PM said in a statement.

Malaysia's Prime Minister Najib Razak (L) shakes hands with China's President Xi Jinping during the Asia-Pacific Economic Cooperation meeting on November 11, 2014

But while the South China Sea and the 1MDB corruption scandal—topics impacting the international relations of both economies—aren't officially on the docket, they will indirectly influence each leader's rhetoric.
Najib is expected to focus on boosting Chinese funds into his country, paying particular attention to new technologies and infrastructure.
"Trade and investment is crucial at a time when Najib needs a further boost in the Malaysian economy so as to enhance his performance legitimacy to govern the country," Dr Mustafa Izzuddin, fellow at ISEAS-Yusof Ishak Institute, a Singapore-based think tank, pointed out.
"A sustainable growing economy, especially in 2017, will be a critical factor as to when Najib will hold the elections [due in 2018] and for Najib bolstering the chances of his coalition returning to government."
For the past two years, Najib has been embroiled in an international scandal around billions siphoned from state development fund 1Malaysia Development Bhd (1MDB), a situation that has tarnished his international reputation and triggered widespread calls at home and abroad for his resignation.
The blow to Najib's legitimacy has meant he's had fewer visits with Western leaders, resulting in lower foreign direct investment from the West, so China's friendship means a great deal, James Chin, director of the Asia Institute at the University of Tasmania, explained.
In return for funds, meanwhile, Beijing could gain a strategic ally in the thorny South China Sea problem.
Chinese leaders are upping the ante in the fight over rights to the resource-rich marine area by widening the mainland's network of supporters in Southeast Asia, Izzuddin said. 

Manila, a major player in the South China Sea dispute, recently realigned itself with the world's second-largest economy, with Rodrigo Duterte announcing a separation from China's foremost rival, Washington, last week.
"China regards Malaysia as an important player in the Association of Southeast Asian Nations (ASEAN) bloc, and a claimant that Beijing believes it can have a more reasonable dialogue to address and resolve the South China Sea dispute, notwithstanding Malaysia's own shifting and ambiguous stance," Izzuddin explained.
"China knows Najib needs it more than the other way around, so Beijing will give him the five-star treatment to signal to the rest of the world that they have Malaysia in their pocket," Chin added.
Moreover, Beijing could use its own involvement in the 1MDB affair to sweeten the relationship. Because Chinese money helped save 1MDB from insolvency, Beijing will use its leverage on the issue carefully to keep Najib on China's side, said Chin.
In November, China General Nuclear Power Corp. said it would pay $2.3 billion in cash and take on an unspecified amount of debt for a group of power plants from debt-ridden 1MDB. 

The following month, China Railway Construction Corp agreed to buy a 60 percent stake in a 1MDB property project called Bandar Malaysia for $1.7 billion in a joint venture with Malaysian Iskandar Waterfront Holdings.
"Chinese leaders are aware that the U.S. [a key ally of Malaysia] have already pressed Najib. Taking the opposite position of non-interference is more likely to benefit China, as it will draw Malaysia under Najib closer, economically and strategically," noted Izzuddin.

A delicate trade-off
Like The Philippines, Vietnam and Taiwan, Malaysia claims a dozen of islands in the disputed South China Sea but unlike its peers, Najib's administration has stayed largely silent on the mainland's aggressive expansion in the area.
Manila under its previous leadership launched a legal case in The Hague to support its assertions, Vietnam has installed rocket launchers on its five bases in the area and even Taiwan, whose voice is often drowned out by Beijing, "ruled out the possibility of any active cooperation with China" on the issue, the American Chamber of Commerce in Taipei said in a report last month.
Kuala Lumpur's response, on the other hand, has been muted.
According to Reuters, Najib's government ignored reports of Malaysian fishermen being bullied by men aboard Chinese Coast Guard vessels last year. 

"When the Chinese entered Indonesia's waters, they were immediately chased out. When the Chinese vessels entered our waters, nothing was done," an unnamed Malaysian minister told Reuters in June.
In March, Minister Shahidan Kassim said that about 100 Chinese registered vessels were detected in the Luconia Shoals, one of the largest reefs in the South China Sea. 

But a few days later, then-defense minister Hishammuddin Hussein refuted those claims, in an indication of the government's policy confusion.
Strategists agreed that Najib was unlikely to press Beijing on the matter for fear of angering his country's largest trade partner. 

But Najib's silence on the South China Sea could then be used as fodder by angry Malaysians seeking the PM's exit over the 1MDB episode.
"One interesting question to come out of this is how ardent Malays feel about being in hock to China," William Case, professor at City University Hong Kong, remarked in an email.