Malaysian Chinese Business: Who Survived the Crisis?

        

In the not so distant past, as economic growth was gathering pace in East Asia, Chinese enterprise was widely considered a significant factor in the process described as the Asian economic miracle (World Bank 1993; Anderson 1998). Ethnic Chinese in Indonesia, estimated at about 3 percent of the population, were said to own some 70 percent of firms listed on the Jakarta Stock Exchange. In the Philippines, 50 to 60 percent of the stock exchange’s market capitalization was reportedly held by Chinese, who form only 1.5 percent of the country’s population. In Malaysia, ethnic Chinese account for less than 30 percent of the population and were estimated to own more than 40 percent of corporate equity in 1997, while in Thailand it was said that 50 ethnic Chinese families controlled most of the country’s business sectors (Backman 1999). Highly publicized profiles of Chinese enterprise attracted great public interest and were used to illustrate the community’s strong economic presence in East Asia.

Yet even prior to the Asian financial crisis of`1997 and among those accepting the dynamic contribution of Southeast Asian Chinese to the regional economy, concerns were raised that the extent of their corporate dominance was misrepresented (Mackie 1995). Figures showing business ownership by Chinese were challenged, and it was argued that such figures should be revised downward. The general political weakness of the Chinese in Southeast Asia, it was also maintained, made their businesses constantly vulnerable to policies limiting their capacity for growth and/or their ability to move into new sectors (McVey 1992). In many cases, they were forced to rely on connections with powerful groups to generate growth (Gomez 1999). Consequently, the sustainability of Chinese businesses in certain countries remained uncertain, even where they appeared to be a dominant economic force.

And so when financial crisis on the scale of the 1997 debacle occurred, it was to be expected that Chinese enterprises in Southeast Asia would be the most affected. Indeed, this generally did happen. Significantly, however, Malaysian Chinese businesses appear to have suffered far less than their Thai and Indonesian counterparts. The number of Malaysian Chinese firms adversely affected by the crisis was nowhere near the number in Thailand, where it is said that of the more than 50 Sino-Thai families with dominant control of the economy, only 4 survived (The Straits Times, 29 January 2001). Nor were big Malaysian Chinese enterprises as affected in number or intensity as similarly-sized Indonesian Chinese firms. There, several prominent Chinese business groups, including the huge Salim Group conglomerate owned by Lim Swie Liong, have nearly collapsed. Further, the public impression in Malaysia is that Chinese companies were not as badly affected by the crisis as were firms owned by other ethnic groups.

Determining the impact of the crisis on Chinese business in Malaysia is no easy task. There is, first, the complexity of the event, at once a currency and a debt crisis, to which the government’s response had a variety of implications. Second, Chinese business is not homogeneous, but is comprised of large, medium, and small-scale enterprises. As Mackie (2000) pointed out in response to the common practice of identifying Chinese business primarily with big corporate players, there are very few studies that examine lower-level enterprises in detail. Until such studies are carried out, it is improper to generalize about Chinese enterprise in any particular country. Hence, this article makes no pretence of being exhaustive, but does attempt to show the complexity of analyzing Chinese capital in Malaysia. We then review the crisis’ direct impact on the Malaysian currency, stock market, and debt; its indirect impact on the general economy; and the general shape and significance of the government’s response. Finally, we relate these, in specific detail where possible, to the various sectors of Chinese business and, where data can be found, discuss the findings.

Key Concepts and Sources

The classification of Chinese big business is not simple despite the considerable literature on this group. The Malaysian Ministry of International Trade and Industry (MITI) defines any enterprise with sales of over RM25 million as a large-scale enterprise. But that definition does not adequately convey the broad picture of Chinese big businesses, some of which have assets and sales in the billions. The common approach adopted by analysts is to look at the stock market for highly capitalized enterprises – those within the top 50 or 100 firms – that are Chinese-controlled. To this are added relevant Chinese capitalists appearing on lists of the richest Asians and Malaysians compiled periodically by Forbes, Fortune, Malaysian Business, and other local business journals. This approach does omit many big businesses controlled by Chinese, however, particularly “old wealth” families who have not publicly listed their firms for fear of losing control of them (although the number of these are shrinking with time). Even capital listed on the stock exchange may not constitute the total volume of shareholder wealth as many individuals have considerable private assets that have not been injected into the listed enterprises. Furthermore, a major Chinese business figure or family may control more equity in a quoted company than is listed in its name.

Despite these limitations, the classification of big business used here does not depart from the common approach because of the difficulty of coming by reliable data. We have obtained names from the Kuala Lumpur Stock Exchange (KLSE); from figures published by the national asset management company, Pengurusan Danaharta Nasional, concerning companies whose debts it has taken over; from the list of companies filing for protection from creditors (as of mid-July 1998); and from other government publications. While these sources do not indicate the ethnicity of companies, it is not difficult to identify the better-known Chinese-owned or controlled companies. Relevant magazines and newspapers, especially local publications which often give more detail than non-Malaysian journals, have also been consulted. Finally, interviews with knowledgeable Malaysians supplement gaps in the published data.

There is also a problem defining SMEs, “small- and medium-scale enterprises,” a term often used interchangeably with SMIs, “small and medium industries.” Here, SMIs refer to enterprises primarily involved in manufacturing, while SMEs refer to the larger group that includes such non-manufacturing industries as retail. The problem is that the definition of SMEs/SMIs has varied greatly over time according to different agencies using different terms (Rogayah 2000). For example, the Credit Guarantee Corporation first defined an SMI as a registered business with net assets and shareholder funds of not more than RM250,000. In 1988, this definition was revised upward to not more than RM500, 000. MITI, on the other hand, considers a “small-scale industry” (SSI) as one with a paid-up capital of below RM500,000 employing less than 20 people, and a “medium-scale industry” (MSI) as one with a paid-up capital of between RM500,000 and RM2.5 million employing less than 75 full-time employees. Since then, a new definition of SMIs has been provided to include firms of not more than 150 workers with annual sales not exceeding RM25 million. In May 1996, following the establishment of the Small and Medium Industries Development Corporation, this definition of SMIs was refined. Small-scale companies are those which have employees not exceeding 50 and annual sales turnover not exceeding RM10 million. Medium-scale companies have 51 to 150 employees and annual sales turnover of between RM10 million and RM25 million. In this article, where data can be found on SMEs or SMIs, the definition that comes along with it will be accepted

The last comprehensive survey of SMEs was carried out in 1994 (Chandraswami, Wong, and Ong 1999), and therefore reliable figures on the number of these enterprises are not easy to obtain. It is even more difficult to get statistics on specifically Chinese SMEs because registration, as for the larger companies, is done by business, not ethnicity. Estimates can be made, however, by checking the number of SME bank loan applications and by utilizing membership lists of trade and business associations that are obviously Chinese dominated. For instance, a press statement issued by the President of the Selangor Chinese Chamber of Commerce and Industry placed the number of its SME members at 2000. The Plastic Manufacturers Association in Malaysia estimated its membership at 1600. The Malaysian furniture industry includes about 3000 manufacturers ranging from small cottage industries to large, integrated producers with their own raw material and wood-processing facilities (Malaysian Business, 1 January 2001). By compiling such information, we can estimate the number of SMEs at around 200,000. Of these, 22,000 are SMIs involved in manufacturing and industry. More than 80 percent of these SMIs are Chinese-owned.

Finally, although the various definitions of SMEs and SMIs have no lower limits, there is actually a third level of business that is much smaller. These are the sundry shops, coffee houses, photography studios, and other such businesses that exist in large number, many owned by Chinese. Because of the extreme difficulty of obtaining data on these very small businesses, however, they cannot be considered here. Our main focus in the “small and medium” category will be on the SMIs.

Financial Crisis: Impact on Malaysia and Government Response

The direct impact of the financial crisis was seen in the precipitate drop of equity prices of firms listed on the KLSE. In February 1997, the KLSE composite index peaked at 1,271 points, and on 1 September 1998 it reached an historic low of 262. This sharp decline in the value of quoted equity was triggered by foreign investors pulling out funds and a simultaneous speculative attack on the Malaysian currency. The government would argue that many of those involved in currency speculation were also fleeing the stock market and that this contributed to the severity of the fall of both the ringgit and corporate equity.

The stock market and ringgit’s drop was devastating to highly-geared enterprises. Companies that had taken loans from abroad found that the sudden depreciation of the ringgit increased the size of their loans and interest payments appreciably. Those businessmen whose loans from domestic banks were pledged against shares experienced margin calls when the value of their shares fell. Reports that some banks were disposing of pledged shares further depressed prices on the stock exchange. The sharp decline of the KLSE and the specter of companies unable even to service interest on loans then created pressure on bank liquidity. By June 1997, the exposure of banks to property and stocks had grown to 40 percent, and the fall in property and equity prices left them suddenly quite vulnerable (Malaysian Business, 16 October 2000). This liquidity crunch led to a general loss of confidence in the economy, a situation that further deteriorated in early 1998 with a spate of large withdrawals of deposits. There were signs of runs on one or two financial institutions, some depositors began moving money to branches of foreign banks in Malaysia, and others transferred funds out of the country altogether. Local banks responded by raising interest rates, which in turn worsened the debt situation for private enterprises.

This sequence of events precipitated a massive contraction of the Malaysian economy. During the first six months of 1998, the Gross Domestic Product (GDP) shrank by 8.4 percent. The third and final quarters of 1998 saw negative growth of 10 percent. After more than a decade of steady economic expansion, Malaysia was in recession. The contraction was seen in all sectors, but most sharply in construction, which shrank by 22 percent, followed by manufacturing (10.2 percent), agriculture (9.2 percent), and services (1.7 percent). In the period 1996-1998, private investment registered negative growth of 19.7 percent while foreign direct investments (FDI) also declined. It was only toward the end of the first quarter of 1999 that positive growth returned, reaching 4.1 percent in the second quarter of that year.

As more and more companies became heavily burdened with debt, the government adopted measures to shield the country from further financial instability. The most common option available to debt-burdened companies was a restructuring process under Section 176 of the Malaysian Companies Act 1965, under which 30 publicly-listed companies were granted protection from creditors in September 1998. Creditors complained, however, that companies abused Section 176 by incurring further liabilities or by hiving off assets to their directors or substantial shareholders. To supplement the existing, inadequate mechanisms, Bank Negara, the central bank, set up the Corporate Debt Restructuring Committee (CDRC) on 17 August 1998. Through the CDRC, still viable companies owing at least RM50 million and having more than one creditor could work out a corporate restructuring in a more amiable atmosphere. Without resort to legal procedures, restructuring was planned jointly by companies and creditors. A total of RM45.9 billion worth of debts have been referred to the CDRC. Of those debts, 38 cases involving RM25.7 billion had been restructured and another 20 cases accounting for RM16.3 billion remained to be re-worked as of late 2000 (Malaysian Business, 16 October 2000).

The government took several other steps to assist companies’ recovery from the financial crisis. First, the Prime Minister established the National Economic Action Council (NEAC) to advise on the country’s economic recovery. The NEAC was placed under the control of former Finance Minister Daim Zainuddin, who had been credited with pulling the country out of recession in the mid-1980s. Second, the government introduced capital controls. Effective 1 September 1998, the ringgit was no longer tradable outside Malaysia and payments by residents to non-residents of RM10,000 and higher required the approval of Bank Negara. The exchange rate was fixed at USD1 to RM3.80, in contrast to the free exchange rate of RM2.50. This measure was significant in two respects. By stemming the outflow of capital, it reputedly saved the economy, and hence some Chinese businesses, from ruin. It also made Malaysian exports more competitive and benefited Chinese SMIs that exported goods.

Third, in April 1998, the government established Pengurusan Danaharta Nasional to relieve the banking system of its non-performing loans (NPLs) and assets and to allow banks to resume normal business and strategic planning. There was an accompanying easing of monetary policies, wherein the statutory reserve requirement for banks was lowered from 13.5 to 6 percent and the base-lending rate of major commercial banks was reduced to 11 percent. The extent of the loan problem facing the country was evident in the value of NPLs. As of mid-2000, total NPLs in the system amounted to RM86.84 billion, of which Danaharta Nasional had acquired RM37 billion. The balance remained with financial institutions.

Fourth, to help banks recapitalize as quickly as possible, a National Capital Fund, Danamodal, was established on 10 August 1998. At the same time, a concerted move was made by the government to consolidate the financial sector, the implications of which will be discussed below.

Finally, the government relaxed some limits on foreign equity participation. Where previously foreign ownership in a Malaysian venture was limited to 30 percent, the government now allows foreigners to hold majority control in the telecommunications industry and, if new investments are made, in the manufacturing sector. In stockbroking and insurance enterprises, foreigners can own up to 49 percent equity.

General Impact on Chinese Business

Three years after the crisis, the Singapore-based Oversea-Chinese Banking Corporation (OCBC) studied the financial standing of large enterprises operating in the region and suggested that the big Chinese businesses remained strong. In Malaysia, the OCBC analysis argued that Robert Kuok, timber magnate Tiong Hiew King, Genting Group’s Lim Goh Tong, Sarawak-based Yaw Teck Seng, banker Teh Hong Piow, Hong Leong Group’s Quek Leng Chan, and power and property tycoon Yeoh Tiong Lay had emerged relatively unscathed from the crisis (The Straits Times, 29 January 2001). In Thailand, some Sino-Chinese family businesses were beginning to recover. Meanwhile, in Indonesia, a number of analysts argued that the return of the country’s Chinese would be necessary to drive the country’s economy to full recovery.

The government in Malaysia seemed to take a similar view of the economic resilience of the Chinese. In February 1998, the NEAC considered allowing non-Bumiputeras (Bumiputra refers to Malays and other indigeneous people in both Peninsular and East Malaysia) and foreigners to own a larger volume of shares of local companies (The Star, 21 February 1998). In July 1998, the NEAC reported that the market value of equity held by Bumiputera companies had dropped by 54 percent in the year since the crisis and that Bumiputera ownership of publicly-listed stock at market value had similarly declined from 29 percent in June 1997 to 27 percent in February 1998 (The Straits Times, 24 July 1998). The NEAC recommendation was seen by some as an effort by the government to allow cash-rich Malaysian Chinese and foreigners to take over or inject cash into Bumiputera companies that were struggling with debt problems. It was only in the strategic industries of banking, automobiles, aerospace, and shipping that the 30 per cent ceiling on foreign ownership would remain in force. The suggestion that non-Bumiputeras be allowed to take up a larger stake to help recapitalize Bumiputera firms was not widely implemented. Instead, prominent Bumiputera-owned companies received government assistance in resolving their debt problems. Clearly, the government was unwilling to alter the equity balance among the ethnic groups despite the financial crisis.

In the financial sector, new moves by the government to stabilize the sector gave rise to concern among large Chinese firms. To consolidate and strengthen banks in the wake of the financial crisis and in preparation for World Trade Organization (WTO) liberalization, the Malaysian government directed that all fifty-four finance companies be merged into only six anchor institutions. Unease arose from the fact that of the six proposed anchor banks, only Public Bank and Southern Bank were controlled by Chinese. The other Chinese banks would be absorbed into largely Malay-controlled or state-controlled institutions. Several of these, such as Ban Hin Lee Bank and Hong Leong Bank, had performed far better than the institutions they were to be absorbed into. The fear was that even Public Bank, Malaysia’s largest Chinese-controlled bank, would eventually no longer be in Chinese hands once its major shareholder, Teh Hong Piow, passed from the scene.

Following much protest and lobbying from the banking community, the number of anchor banks was raised from six to ten, mainly because two Malay banking groups not on the original list – one headed by Rashid Hussein, the other by Azman Hashim – lobbied successfully to retain control of their enterprises. Only one other Chinese-controlled bank, Quek Leng Chan’s Hong Leong Bank, was granted anchor bank status. The bank merger exercise was widely viewed as a setback for Chinese business.

More generally, the effect of the crisis on individual Chinese firms can be indirectly gauged by examining its impact on the different sectors of the economy. Table 1 shows participation in the various economic sectors by ethnicity. In the construction sector, which suffered the most severe contraction, 54.9 percent of firms were Chinese-owned. In manufacturing, the Chinese held 52.6 percent of companies, while in agriculture, which fell by 9.2 percent in 1998, the Chinese business share was 57.9 percent.

Table 1. Economic Sector Participation by Ethnicity, 1998 

Sector	Bumiputera	Chinese	Indian	Others*	Total
Agriculture	12.2	57.9	0.9	29.0	100
Mining	14.1	45.6	0.1	40.2	100
Manufacturing	8.7	52.6	1.0	37.7	100
Elec., Gas, Water	22.3	39.6	1.3	36.8	100
Construction	25.1	54.9	1.0	19.0	100
Retail & Wholesale	18.3	57.9	1.6	22.2	100
Transport	29.0	42.7	2.2	26.1	100
Finance	16.8	52.8	1.9	28.5	100
Others	29.0	49.7	2.1	19.2	100
* Foreign, joint companies of Malays and non-Malays, and others. Sources: Compiled from figures from the Economic Planning Unit (EPU), Malaysia.

Impact on Big Chinese Business

The Chinese companies that proved vulnerable during the crisis were those that had diversified beyond their core businesses or had entered into speculative ventures. Acquiring quoted equity and developing property were popular forms of asset building in the years preceding the crisis – both were relatively accessible to the Chinese and easily liquidated. Further, property and stock prices had been rising steadily, in part due to the large inflow of overseas funds. The crisis had a two-fold impact on these firms. Those that had relied on heavy borrowing to diversify their operations were already experiencing problems, and when the currency depreciated, loan repayment became a struggle. How well these companies coped depended on whether they were able to service interest charges, meet loan repayment schedules, and make up the shortfall in the margin call of pledged shares that had fallen greatly in value.

The sharp and immediate drop in property values also had severe consequences for companies that had recently shifted into property development and construction. According to the National Property Information Centre, about 16 million square feet of office space remained vacant in the Klang Valley alone in June 2000. At an absorption rate of 2-2.5 million square feet per year in a growing economy, it would take five to seven years for this vacant space to be occupied (Malaysian Business, 1 January 2001).

The individual large Chinese firms affected by the crisis fall into four categories:

• those unlikely to recover;
• those with heavy losses and loans in the process of restructuring;
• those with the reserves to ride out the period of low turnover and profits; and
• those which performed well during the economic slowdown.

The Casualties: Many of the first category can be found among companies that filed for protection under Section 176 of the Companies Act by mid-July 1998. Most notable was Time Engineering, a subsidiary of Renong, the largest Malay-owned conglomerate in Malaysia. The Chinese-owned or controlled companies that filed for protection include shipbuilder Westmont Industries, financial services firm MBf, appliance maker Kuala Lumpur Industries, property developer Wembley Industries, and stockbroker Uniphoenix. Other firms had their debts taken over by Danaharta Nasional. As of December 2000, 32 out of 76 companies placed under Danaharta special administrators were identifiably Chinese-owned. Several of these had been high profile in the pre-crisis period: Malaysia Electric Corporation, Jupiter Securities, Sin Heng Chan (Malaya), Instantgreen Corporation, Seng Hup Corporation, Timbermaster Industries, Woo Hing Brothers (Malaya), Bescorp Industries, Sri Hartamas, Rahman Hydraulic, and Kuala Lumpur Industries Holdings.

Most of the companies or individuals who fell into immediate and serious trouble were those with heavy debt. In the pre-crisis period, a number of businessmen had taken huge loans to acquire properties or listed companies. Pledging shares of their own firms, some of which had price-earnings (PE) ratios of 18, to acquire companies with PE ratios of 6, seemed an intelligent way to expand and diversify. In a period when loans were easy to obtain, some investors then used the acquired shares to make further acquisitions. These corporate raiders bought up sizeable numbers of shares of targeted companies with the aim of driving up share prices before disposing of them at a huge profit.

Two businessmen known for ambitious acquisitions and takeovers who later came to grief are Soh Chee Wen and Joseph Chong Chek Ah. Soh began with the takeover of a company called Autoways Holdings. He subsequently acquired, among others, the stockbrokerage firms Uniphoenix and Halim Securities and the manufacturer Perstima (involved in the production and sale of electrolytic tin plate for the canning industry), which he later sold off. But Soh became heavily indebted and his companies were eventually placed under Danaharta Nasional’s special administrator.

Like the businesses acquired by Soh Chee Wen, some of those bought by Joseph Chong were considered healthy, such as the publicly-listed Wing Tiek Holdings and Westmont Industries. Other of Chong’s companies included Westmont Land, later re-named Techno Asia Holdings, and Prima Mould Manufacturing. Chong took over Sabah Shipyard and proceeded to acquire the National Steel Corporation of the Philippines. But in mid-1997, talk began of major financial problems at Westmont Industries. According to a report in The Edge (16 November 1998), an investigative audit revised Westmont’s accounts to indicate a huge loss instead of profits for the 1996 financial year. The crisis greatly aggravated Chong’s problems. As of December 1997, Westmont’s losses amounted to RM651.4 million and liabilities totaled RM883.7 million, including short-term and other debt of more than RM400 million. Westmont became the first of 30 publicly-listed companies to file for protection under Section 176. Chong’s Wing Tiek Holdings, which had accumulated losses of RM200 million, was also forced to restructure. Chong is no longer associated with the two companies.

Perhaps the most spectacular corporate fall due in part to overexpansion and the crisis was that of Lim Thian Kiat (better known as T.K. Lim) of Multi-Purpose Holdings. Multi-Purpose Holdings was once linked to the Malaysian Chinese Association (MCA), a senior member of the ruling Barisan Nasional (BN) coalition. Lim’s family had used its own company, Kamunting, to gain control of MPH during the 1986 recession, however, after the firm went on a massive acquisition binge and subsequently suffered heavy losses. Lim belonged to the new generation of young and ambitious corporate players, and under his control Multi-Purpose Holdings expanded further. Lim also had political connections and was reportedly close to Anwar Ibrahim, Malaysia’s Deputy Prime Minister between 1993 and 1998. The heavily-diversified Multi-Purpose Holdings group included Multi-Purpose Bank, Malayan Plantations, property developer Bandar Raya Developments, and the gaming firm Magnum Corporation. By 1997, Multi-Purpose Holdings had incurred debts amounting to RM2.2 billion, and Lim’s Hong Kong investments were also said to have suffered heavily from falling property values.

 The Restructuring: The second group of Chinese enterprises are struggling to restructure company debts. Among these is the Lion Group, controlled by William Cheng, which has substantial interests in nine publicly-listed companies as well as investments in China. Following the depreciation of the Malaysian currency, the group began to have problems servicing its roughly RM10.4 billion in debt, about half of which was secured in US dollars. The loans were taken for Lion Group’s investments in China and for the construction of a RM2.5 billion steel plant in Banting, Pahang, by Cheng’s private firm, Megasteel. Cheng’s stock broking business – with brokerages in Malaysia, Indonesia, Singapore, and the Philippines – suffered huge losses following the stock market fall, further weakening the group’s financial position. The crisis caused demand to fall for its steel products and its motor vehicles produced under the brand name Suzuki. Most of the group’s other companies lost money, including Lion Land. Only two of Cheng’s companies remained profitable: the timber operations of Sabah Forest Industries and the insurance firm Malaysia British Assurance. Cheng had eventually to go to the CDRC, through which he hoped to reach agreement with his more than 100 creditors. He has since been forced to sell his stakes in Malaysian British Assurance as well as his corporate headquarters in Kuala Lumpur (Malaysian Business 1 January 2001).

Equally hard hit was the Sungei Way Group headed by Jeffrey Cheah. The group is involved in property development and construction, the two industries greatly affected by the economic downturn. Cheah’s other losses came from his listed firm, Gopeng, and the provisioning for the US$110 million Eurobond due in 2001. Cheah sold off some of the Group’s companies, but still owns assets such as Sunway Pyramid and Sunway College, which are not part of the listed Sunway Group.

The Resourceful: The third group of Chinese firms are steadily recovering from the crisis without crippling debt or the need to restructure. Some were badly affected, like Tan Chong Motors and Oriental Holdings, both in the motor industry which experienced a sharp fall in demand. Kuala Lumpur Kepong, a plantation company built by the late Lee Loy Seng but now run by his son, is another well-managed firm that was affected by the cyclical fluctuation of commodity prices. We also count within this group Chinese businessmen whose public and private wealth remains fairly intact despite financial crisis and economic slowdown: Quek Leng Cheng of the Hong Leong Group, Lim Goh Tong of the Genting Group, and Teh Hong Piow of Public Bank.

The Winners: A small group of Chinese businessmen came out of the crisis stronger financially. Francis Yeoh of the YTL Group stands out among these. The YTL Group was started by his father, Yeoh Tiong Lay, as a construction company and has since diversified into power generation. The group has several listed companies, including Taiping Consolidated, and assets estimated to be worth RM8.70 billion at current values. The Group owns prime property in Kuala Lumpur’s city center, including the JW Marriot Hotel and the shopping complex Lot 10. According to a report in early 2001, the Group has RM5 billion cash that may be used for further acquisitions, particularly power plants being sold off by the privatized but still government-controlled power supplier, Tenaga Nasional (The Edge, 5-12 February 2001).

Profiles of Top Chinese Businessmen

 In February 2001, Malaysian Business released its list of the 20 richest Malaysians. Sixteen of the 20 and 9 of the top 10 were ethnic Chinese. A number of other wealthy Chinese outside the top 20 also control well-managed corporations (Malaysian Business, 1-16 February 2001).

Table 2. Twenty Richest Businessmen in Malaysia, 2001 

Individual	Estimated Value	Sector
1 Robert Kuok	RM15 billion	Diversified: media, plantations, shipping; 13.5 billion in overseas assets
2 T. Ananda Krishnan	RM10.7 billion	Communications and media
3 Lim Goh Tong	RM9.6 billion	Genting and five listed companies; casino, plantations, power, property, oil and gas
4 Quek Leng Chan	RM9.2 billion	Hong Leong and twelve listed companies; Diversified: property, banking, manufacturing, Hong Kong and New Zealand investments
5 Yeoh Tiong Lay	RM5.5 billion	YTL group: construction, power utilities
6 Tiong Hiew King	RM3 billion	Ribunan Hijau Group, diversified; timber, banking, insurance, media, overseas investments in Hong Kong, US, Canada, Solomon, Papua New Guinea
7 Teh Hong Piow	RM2.8 billion	Public Bank: banking and financial services; Hong Kong and Bermuda investments
8 Loh Cheng Yean	RM1.4 billion	Oriental Holdings, motor distribution, plantations, properties, manufacturing
9 Lee Oi Hian	RM1.2 billion	KLK Bhd, Batu Kawan Bhd, plantations and plantation-related manufacturing
10 Lee Shin Cheng	RM1.91billion	IOI Corporation, Palmco Holdings, plantations, properties, and manufacturing
11 Abdul Rashid Hussein	RM891 million	Banking, broker, and investment banking
12 Tan Kim Hor	RM890	Tan Chong Motors, trading, manufacturing, distributorship
13 Khoo Kay Peng	RM700 million	MUI Bhd, insurance, hotels, retailing, education; Hong Kong, U.S., Australia
14 Low Yow Chuan	RM691 million	Properties, hotels
15 Yaw Teck Seng	RM596 million	Lingui Development Bhd, Glenealy Plantations timber and plantations
16 Azman Hashim	RM542 million	Arab-Malaysian Corporation Bhd, banking
17 Lau Hui Kang	RM500 million	Timber, plantations, aquaculture, tourism
18 Tan Chin Nam	RM485 million	IGB Corp, IJM, Tan & Tan, property and investments overseas
19 Samsuddin Abdul Kadir	RM365.5 million	Sapura Holdings, telecommunications
20 Tan Teong Hean	RM337 million	Killinghall Bhd, Southern Bank, banking
Source: Malaysian Business (1-16 February 2001)

The wealthiest Malaysian businessman is Robert Kuok, whose estimated worth is RM15 billion. Starting off in the sugar trade, Kuok diversified into a wide range of business interests, but the bulk of his investments are outside Malaysia, including in Hong Kong and China. Lim Goh Tong (#3), the second richest Chinese businessman, built his wealth largely from the casino business at Genting Highland and has controlling stakes in the publicly-listed Genting, Resorts World, and Asiatic Developments. Despite problems with the Hong Kong-listed Star Cruises Plc, in which he holds a 20 percent stake, Lim is said to have RM2.4 billion surplus cash.

Quek Leng Chan (#4) of the Hong Leong Group remains financially strong. His business empire stretches from Hong Kong to New Zealand, Europe, and the United States, and he controls at least 11 companies listed on the Malaysian stock exchange. Quek’s most important asset is probably Hong Leong Bank, which now has anchor bank status in the on-going banking consolidation. Most of Quek’s manufacturing companies, such as OYL Industries and Malaysian Pacific Industries (MPI), are performing well, though two, Hong Leong Industries and Hume Industries, have a debt burden of RM2 billion. In the restructuring exercise, it is expected that one of these two companies will be sold off to ease the Group’s debt situation.

Teh Hong Piow (#7) has long been respected for his prudent management of Public Bank. The Public Bank Group’s pre-tax profit was RM150.1 million in 1998, a decline from RM472.7 million for the corresponding period in the preceding year. In 1999, however, the Group’s profits rose sharply to RM600 million, a performance surpassing that of other banks. Public Bank’s prudence in lending is reflected in its low proportion of non-performing loans (NPLs). When the default period for loans was three months – it was subsequently increased to six months – Public Bank’s net NPL was only 2.4 per cent compared to the whole banking system’s 9.3 percent. It was the stockbroking arm of the Public Bank Group that suffered losses at the height of the crisis in 1998, but this firm has since returned to profitability. Its commercial bank and finance company in Hong Kong are expected to become the major income earners in the group in the future (Malaysian Business, 16 February 2000).

Chinese businessmen not listed in Table 2 are also major corporate players in Malaysian business. One is Robert Tan Hua Choon, whose companies include telecommunications cable supplier FCW Holdings, industrial equipment supplier Jasa Kita, developer Keladi Maju, and wood-based manufacturer Malaysia Aica (Maica). Tan also has a controlling stake in the watch and calculator distributor Marco Corporation, which deals with Casio products. Marco Corporation is to be used for a reverse takeover of the ailing Khong Guan, listed on the KLSE.

Chinese Business Resilience

How do the resilient Chinese listed in Table 2 differ from those still mired in financial problems? How have they kept their wealth relatively intact during the financial crisis? Previous studies have argued that Chinese businessmen in Malaysia have been able to adapt to new challenges. This was demonstrated during the colonial period and again after independence when the government introduced the New Economic Policy (NEP) in 1970. The 20-year NEP established affirmative action programs to assist Bumiputeras in business (among other areas) and to redistribute wealth to achieve economic parity among the major ethnic communities. As Table 3 indicates, implementation of the NEP did achieve significant redistribution of corporate wealth in Malaysia.

 Table 3. Equity Ownership (at par value) of Limited Companies, 1970-1998 

	Department of Statistics Data*					Registrar of Companies Data*
Category	1970	1982	1985	1988		1985	1990	1995	1998
Bumiputera	2.4	15.6	19.1	19.4		18.5	19.3	20.6	19.4
Individuals	1.6	7.5	11.7	13.0		11.3	14.2	18.6	17.7
Trusts	0.8	8.1	7.4	6.4		7.2	5.1	2.0	1.7
Non-Bumiputera	32.3	35.9	35.9	34.8		49.5	46.8	43.4	41.0
Chinese	27.2	33.4	33.4	32.6		48.2	45.5	40.9	38.5
Indians	1.1	0.9	1.2	1.2		0.9	1.0	1.5	1.5
Others		1.6	1.3	1.0		0.4	0.3	1.0	1.0
Nominee companies	2.0	5.0	7.2	8.1		8.0	8.5	8.3	7.7
Local companies**		8.8	11.8	13.1
Foreigners	63.3	34.7	26.0	4.6		24.0	25.4	27.7	31.8
* Discrepancy in figures is due to differing definitions of the categories. Both sets of figures, however, show the achievement of Bumiputra wealth. ** Dominant ethnic group uncertain. Sources: Compiled from figures from the Economic Planning Unit (EPU), Malaysia.

When the NEP was introduced, the Chinese viewed its initiatives as limiting their economic opportunities and over the years developed strategies to contend with it. One of these strategies was to establish business and political connections with powerful Bumiputeras by allocating shares, partnerships, and board positions to influential Malays. These connections helped Chinese-controlled companies gain access to government contracts and trading licenses. Many of the resiliant Chinese individuals listed above are linked to powerful Malays in one way or another. But the financial crisis showed that such ties were not enough to maintain a firm position in corporate Malaysia and that other qualities were essential to the business performance of successful Chinese enterprises.

First, the resiliant Chinese are all engaged in “real” business – investments are made in producing goods and services (even if some started off as speculative ventures). For example, Quek Leng Chan and Robert Tan own companies involved in manufacturing. In spite of the economic slowdown, these companies continue to generate encouraging rates of return. Second, they are involved in economic sectors less vulnerable to the financial crisis. Palm oil, for instance, a mainstay activity of companies like Lee Oi Hian’s (#9) KLK, enjoyed high prices in the 1997-98 period, though most commodity prices have since come down.

Third, most of these businessmen have concentrated on their core business. Even those in vulnerable sectors, such as the motor industry and property development, have survived through prudent management. Teh Hong Piow focuses on managing Public Bank, an institution he founded in the 1960s, and his diversification has been into related financial sectors. He has significant stakes in the insurance companies London and Pacific Insurance Co Bhd, in which he owns 53.46 percent, and John Hancock Life Insurance (M) Bhd, of which the Public Bank Group’s KL Mutual Fund holds 21 per cent. In the on-going merger exercise of insurance companies, Teh is expected to be a major player in the consolidated sector.

In contrast, many of those who encountered difficulties had diversified beyond their core competence or business interests. In addition to those with ambitious strategies mentioned earlier, there were companies like Woo Hing, well known for its watch business, which went into property development and suffered from the downturn in that sector. John Masters Holding, a garment company listed on the Main Board of the KLSE, is another example.

Fourth, this group of resilient Chinese businessmen has largely avoided the burden of crippling debt. While it is common practice for companies to take bank loans to expand or diversify, well-managed firms always have sufficient asset backing and income flow to service interest charges and loan repayment. These firms retained their profits as reserves, which proved crucial to see them through the difficult business period. Most firms that fared badly were burdened with loans secured from abroad, including William Cheng’s Amsteel, controlled through his Lion Group (see Table 4).

Table 4. Debts of Major Companies (in RM billions)

Company	Foreign Debt	Total debt
Tenaga Nasional	12.0	21.0
Malaysian Airlines	10.5	12.2
MISC	6.5	9.0
Telekom Malaysia	5.3	7.3
Renong	2.6	8.7
TRI	2.1	2.8
Amsteel (William Cheng controlled)	2.1	6.0
Source: Malaysian Business 1 October 2000

 Finally, a number of successful business groups had diversified their interests abroad. The bulk of Robert Kuok’s business interests and assets – in China, Hong Kong, Europe, and elsewhere – were shielded from the financial crisis and currency devaluation. Quek Leng Chan owns companies in Hong Kong and Europe. Khoo Kay Peng (#13), Tiong Hiew King (#6), Teh Hong Piow, and Tan Chin Nam (#18) also have significant investments abroad. Yet overseas investments were not always helpful. T.K. Lim’s Multi-Purpose Holdings lost money in Hong Kong through its Magnum International Holdings Ltd, which was listed on the Hong Kong stock exchange. Others who ventured into Vietnam and Cambodia did not recover their investments. The Lion Group’s investments of some US$80 million in China did not help William Cheng deal with the financial crisis (Malaysian Business, 16 September 1999).

Impact on Small Chinese Business

The most immediate and direct impact of the crisis on Chinese SMIs was the sharp reduction of credit facilities available to them. Before July 1997, borrowing from domestic banks and other financial institutions made up of 38 percent of short-term and 43 percent of long-term credit. These percentages were greatly reduced when banks, facing liquidity problems, cut credit to the SMIs and raised interest rates on new loans. As the crisis deepened, domestic demand for SMI output declined while production costs increased for those using imported materials, machinery, and parts.

The manufacturing sector as a whole contracted by 10.2 percent in 1998, due not only to local conditions, but to declining demand in the East Asian market, which had accounted for one-third of Malaysia’s manufactured exports. The industries most affected were transport equipment and machinery manufacturers and those producing goods for construction – iron and steel, wood and wood products, and cement. More resilient were the chemical and chemical products manufacturers, including those dealing with plastic products in the resource-based industries. The leading performers in manufacturing continued to be makers of electrical and electronic products.

To help affected SMIs, the government created a Fund for Small and Medium-Scale Industries (FSMI) in January 1998. An initial RM1 billion and (in May 1998) an additional half billion ringgit was set aside to assure this sector of continued financing during the economic slowdown. Conditions were also relaxed to increase access to credit: the minimum amount loaned was reduced from RM250,000 to RM50,000; the maximum was raised from RM2 million to RM5 million; and the 20 percent limit on working capital was abolished. In November 1998, a Rehabilitation Fund for Small and Medium-Scale Industries (RFSMI) was established with RM750 million to assist viable SMIs with temporary cash flow problems to service existing loans. As of 30 June 1999, the value of loans approved by the RFSMI was RM1.831 billion. The RFSMI had also by that time approved RM152 million in assistance. Given the high demand for loans from the RFSMI, RM250 million was transferred in August 1999 from the RSFMI to the FSMI.

In February 1998, the political party MCA and the Associated Chinese Chamber of Commerce and Industries of Malaysia (ACCCIM) jointly organized a seminar to discuss the impact of the Asian financial crisis on the SMIs. Anwar Ibrahim, then Deputy Prime Minister and Finance Minister, was invited to open the seminar and to participate in a dialogue session. The purpose of the seminar was to bring to the government’s attention the difficulties Chinese SMIs were facing, especially in obtaining loans from the RM1.5 billion RFSMI. Following the seminar, the government announced that half of RFSMI resources would be loaned to non-Malay SMIs. The majority of SMIs are in fact Chinese-owned (see Table 5), and according to ACCCIM officials, a major proportion of the RFSMI eventually went to them. Malay SMIs continued to receive assistance from other loan schemes.

Table 5: Rough Breakdown of SME Ownership by Ethnicity

Paid up Capital (RM)	Bumiputera	Chinese	Indian	Other*	Total
10,000 and below	23.7	57.1	2.3	16.9	100
10,001-100,000	25.7	55.0	1.9	17.4	100
100,001-2.5 million	13.9	52.9	1.1	32.1	100
2,500,001-10 million	6.8	18.5	0.7	74.0	100
More than 10 million	2.8	6.5	0.1	90.6	100
* Foreign, joint companies of Malays and non-Malays, and others.
Sources: Compiled from Economic Planning Unit, Malaysia (EPU) figures.

Despite the financial crisis, many Chinese SMEs have survived reasonably well. A report by a private research group (Chandraswami et al.) suggested that the SMIs, Chinese in particular, were spared the worst of the crisis because they were less exposed to borrowing. It is estimated that retained earnings were used to finance the assets and working capital of about half the Malaysian SMIs. External fund sources were: 77 percent from domestic banks; 3-5 percent from foreign banks, bonds, and equity; and the balance from friends, family members, and private moneylenders. In other words, Chinese SMIs were spared the debt problem because they had found it difficult to secure bank loans.

Certain SMIs have actually benefited from two factors arising from the financial crisis. First, the pegging of the Malaysian ringgit to the US dollar at 3.80 effectively undervalued the currency. This has aided the competitiveness of Malaysian products in the international market, where some 30 percent of SMI production is destined. The second factor is continued political and economic uncertainty in Indonesia. When the collapse of Indonesian banks resulted in credit being cut off to Indonesian SMIs, many were reportedly unable to fill orders placed earlier by US companies. Some of these companies have since shifted operations to Malaysia, particularly in textiles and plastics manufacturing.

While Chinese SMIs did relatively well during the crisis and in the following two years, they began to feel the effects of the slowdown by 2000. The pegging of the ringgit increased the price of raw materials and component parts, a growing concern as inventories ran down. In addition to falling foreign demand, the growth of domestic private consumption expenditure dropped from 14.4 percent to 13.9 percent from the first to the second quarter of 2000. At the same time competition from imports increased. In preparation for the WTO and the Asean Free Trade Area (AFTA), import duties on 305 products that had long been protected were reduced in the year 2000 budget. SMIs producing shoes, furniture, and textiles for domestic and export markets felt these effects (see ACCCIM 2000).

The Importance of Chinese SMIs

Manufacturing remains the most important sector in the Malaysian economy. Despite the financial crisis, manufacturing contributed 34.4 percent of GDP, 82.9 percent of total exports, and 27 percent of total employment in 1998. Exports were worth RM 237.68 billion. Large multinationals and big local corporations are responsible for the bulk of production, but local SMIs also produce a considerable share for the domestic and export market. The real significance of Chinese SMIs, however, lies in their production linkages with large-scale industry, including local Chinese companies. These SMIs manufacture components and parts for major domestic companies like DRB-Hicom Holdings and for multinationals such as Intel, Matsushita, and Sony. Just as important are the Original Equipment Manufacturers (OEM) that produce goods for foreign companies.

Through these industrial linkages, some SMIs have evolved into large-scale enterprises, including several listed on the KLSE. Hing Yiap and Padini Holdings, quoted on the Consumer section of the KLSE Second Board, are just two of many companies that started as small family businesses. Both are in the textile and garment industry. Hing Yiap commenced business 29 years ago producing garments for the domestic market. It presently has both its own brand name and is a licensee of an American company. Despite the economic slowdown, Hing Yiap posted an after-tax profit of RM6.3 million on a turnover of RM96.6 million for the financial year ending June 2000 (The Star, 12 February 2001). Padini began business in 1971 as Hyayo Garments Manufacturers Company. It ventured into ladies’ fashion wear and later into children’s wear, producing under the “Miki-Kids” brand name. After a bonus and rights issue exercise, Padini’s paid-up capital was raised to RM27 million. It was listed in March 1998 on the Second Board with a public issue of 3 million shares and an offer of 1.5 million shares for sale (Malaysian Business, 1 September 1999).

A number of small enterprises have moved from the Second Board to the Main Board of the KLSE, such as John Master and EOX Group. EOX began as Eastern Oxygen, a component of the gas operations industry. In January 2001, it acquired Wonder Link for RM140 million, a Malaysian-owned fleet of 122 ships ranging from 4,134 to 18,155 deadweight tons (DWT) operating from East to West Asia and to Australia (New Straits Times, 10 February 2001). EOX’s listing was transferred from the Second Board to the Main Board in early 2001. At least ten other Main Board companies started out on the Second Board. Four in the technology section – AIC Corporation, Eng Teknologi, Globetronics Technology, and Lityan Holdings – are Chinese-owned enterprises.

The Second Board of the KLSE has been important in opening up opportunities for SMEs, especially those owned by Chinese, by allowing them an avenue for expansion. But most Chinese SMIs have chosen to remain small. One deterrent to growth is the Industrial Coordination Act (ICA), under which SMIs with a paid-up capital of RM2.5 million must restructure to allow greater Bumiputera participation. In the early 1980s, though, when the paid-up capital requirement to secure public listing was relatively low, quotation on the KLSE was seen by many firms as an opportunity to expand, diversify, and move into corporate reaches which had easier access to the capital market. Some Chinese businessmen also saw public listing as a chance to cash out or sell part of their holdings and still retain control. During this “corporatization” of the SMIs, smaller firms were often prepared to be taken over and injected as assets into larger firms. Presently, young Chinese in the technology and private education sectors see opportunities for business expansion through such corporate exercises again.

Conclusion

It is clear that major corporate figures in Malaysia were unevenly hit by the 1997 financial crisis, some surviving with their businesses intact and others unable to survive. At the SMI level, too, there were exporters that benefited from the weakening of the ringgit and others that suffered from reliance on imports of materials, machinery, and parts. Some SMIs also felt the credit crunch. A number of conclusions can be made from the variety of experiences recorded by firms following the crisis.

First, among the big businesses, a distinction should be made between “entrepreneurs,” or productive businessmen, and “speculators.” Entrepreneurs can be defined here as businessmen who build “productive” economic enterprises, be they in manufacturing, banking, property, trade, or services, and who invest borrowed money in such enterprises. For example, Lim Goh Tong is an entrepreneur who used his own and borrowed money to create a vast resort empire from scratch. Money was not used to speculate on the stock market or as leverage for yet more borrowing for purposes of speculation or acquisition. Genting operates a major resort-cum-casino, employs tens of thousands of people, and pays significant taxes to the government. Major businessmen Teh Hong Piow and Robert Kuok concentrate on managing their banks and hotels well. And when Robert Kuok and the Teo family (of the See Hoy Chan group) were involved earlier in the sugar and rice trades, respectively, they took the entrepreneurial risks associated with these fields, anticipating demand, ensuring adequate supplies, and consolidating their markets. A speculator, on the other hand, essentially uses money, borrowed or otherwise, not to build a real enterprise but to speculate on the stock market or acquire other properties or firms. The equity gained is then used to leverage additional loans to acquire yet more companies, even if these acquisitions are of dubious economic value. Speculators’ ability to acquire companies in this manner depends greatly on connections with influential people, often politicians in power. The only risk they take is the possiblity of being unable to honor their loans.

It could be argued that the distinction between “entrepreneur” and “speculator” is not sharp. Many entrepreneurs started off as speculators, later concentrated on managing their acquisitions, and became productive businessmen. Others start off as entrepreneurs – building productive enterprises and listing them on the stock exchange – but seeing that wealth can be made more easily through acquisition or corporate raiding, turn their energy to speculative activities.

Further, entrepreneurs often need political connections to develop their enterprises. The foundation of Lim Goh Tong’s Genting was not his construction business, where he first developed a strong reputation, but his casino operation, the licence for which, it could be argued, he obtained through his close relationship with then-Prime Minister Tunku Abdul Rahman. Similarly, Robert Kuok is well known as a skillful cultivator of influential politicians. The need for patronage from powerful political figures is a fact of life for most Chinese big businesses in Southeast Asia. The difference is that entrepreneurs use these licence and business opportunities to build enterprises that produce goods and services, and theirs are the businesses that have generally weathered the crisis.

Second, the area of business involvement was a key factor in determining how well a firm managed. Entrepreneurs in export businesses – from large rubber and palm oil dealers like the KL-Kepong group to many SMIs – fared rather well. Their costs were incurred in ringgit, and they were paid in foreign currency at a time when commodity prices were high. Businessmen involved in property, on the other hand, such as Jeffrey Cheah of the Sunway group, suffered from the property downturn. Even well-managed firms were badly affected.

Time is the third factor. Export-oriented SMIs that benefited from the government’s capital control measures may find this is only a temporary lift and not a long-run advantage. If these and other SMIs do not upgrade their operations to meet the impact of globalization, trade liberalization, and competition from similar products produced more cheaply in China and perhaps India and Vietnam, their enterprises may eventually suffer. Indeed, even now the SMIs that export to the US face the problem of the slowdown in the American economy.

Finally, the Asian crisis should serve as a reminder that attention to the strength of Chinese business in Malaysia (Lee and Chow 1997) and the rest of Southeast Asia (Limlingan 1986, Redding 1990, Mackie 1995) should not preclude analysis of its failures. For every Chinese business success, hundreds of firms cease trading for a variety of reasons. Many failures are due to mismanagement, poor quality products, low technology, lack of product and production innovation, over-borrowing, and moving from core businesses into speculative ventures. The recent financial crisis revealed the variety of business forms utilized by Chinese to develop their enterprises and showed that the strengths and weaknesses of Chinese business in Southeast Asia are mainly structural in nature.

Lee Kam Hing and Lee Poh Ping
Lee Kam Hing was professor of history at the University of Malaya and is now research editor of Star Publications and a director of the Asian Centre for Media Studies. He has written on the Chinese in Malaysia.
Lee Poh Ping is professor and senior fellow in the Institute of Malaysian and International Studies, the National University of Malaysia. He has written on the socioeconomic history of the Chinese in Malaysia and Singapore and on Japanese relations with Southeast Asia.

 Kyoto Review of Southeast Asia. Issue 4 (October 2003). Regional Economic Integration

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