Troubled China-backed project casts shadow on new Malaysia-Singapore trade zone

Amid buzz about a new free-trade zone at the tip of the Malay Peninsula, some observers are wondering if an anticipated rush of foreign investors will pour in money, given a troubled China-backed housing megaproject in the same area.

Malaysia and Singapore signed off last week on the Johor-Singapore Special Economic Zone (JS-SEZ). Officials say it promises to boost the economies of the two neighboring countries with tax incentives for investors, fast-tracked business approvals, and a focus on high-tech industries such as artificial intelligence and renewable energy.

It is “rare to see two countries collaborating as a team to promote mutual economic growth and attract investments,” Malaysian Prime Minister Anwar Ibrahim and Singaporean counterpart Lawrence Wong said in a joint statement on Jan. 7.

But analysts interviewed by BenarNews warn that the still unfinished Forest City project, a U.S. $100 billion endeavor, could spook foreign investment in the JS-SEZ. Started in Malaysia’s Johor state by one of China’s largest developers 12 years ago, the ambitious project has failed to meet its lofty goals and is a cautionary tale.

“The troubled Forest City project could indeed cast a long shadow over the JS-SEZ’s potential to attract investors,” said Michael Warren, founder of Consulting Board Asia, a business consultancy. “Investors may harbor skepticism based on Forest City’s issues, associating them with similar risks in the JS-SEZ.”

China’s potential role in the new free-trade zone is “significant as a source of investment,” Warren told BenarNews. 

White elephant in the room

Launched in 2013, Forest City promised a futuristic urban paradise of luxury condos, shopping malls, and state-of-the-art facilities. It planned to accommodate 700,000 residents in waterfront apartment towers on four man-made islands spanning 30 sq km (11.6 square miles) between Malaysia and Singapore. 

Historically, Johor has had close economic ties with Singapore, with many of its residents working in the Lion City and commuting daily via a bridge that spans the Johor Strait. 

Forest City was touted to create 220,000 jobs and contribute an estimated 200 billion ringgit ($47.6 billion) to the nation’s gross domestic product by 2035.

But with its empty apartments, barren malls, and deserted streets, the development has become a symbol of overreach, earning the project the notorious label of a “white elephant.” 

A recent government initiative to revive the project has introduced tax breaks and reduced income tax rates to attract foreign investors, but analysts remain divided on its potential to spur economic growth in the region.

“One key lesson from Forest City is the importance of aligning development projects with market demand and economic fundamentals,” said Chan Wei Khjan, lead advisor for the SEZ at YYC Group, a financial consultancy firm.

Forest City’s failure stemmed from an overreliance on real estate without a supportive ecosystem, a Johor official said. 

“Everyone learned the lesson after Forest City,” Johor state official Lee Ting Han told BenarNews. “It cannot just be residential or commercial projects. The JS-SEZ has to be about creating jobs, developing industries, and populating the area – not just selling property.”

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Public policy consultant Adib Zalkapli said it would take time to build “a truly seamless business environment” in the region.

Despite these concerns, government officials project that the JS-SEZ will create 20,000 skilled jobs within five years and contribute $4.3 billion annually to Malaysia’s economy.

Chinese investments

Chinese companies are leading foreign investments in the JS-SEZ, market analysts said.

In June last year, Malaysian Economy Minister Rafizi Ramli pitched the zone to over 100 Chinese firms during a visit to Beijing.

“We are not just seeing interest; we are seeing concrete commitments,” said Kohe Hasan, chief executive of M Kapital Consulting, a strategic business advisory firm focused on Southeast Asia.

She pointed to Zhejiang-based Tianma Precision Machinery, which recently pledged $100 million to establish a manufacturing facility in Johor.

“The region provides seamless connectivity to Singapore’s financial, regulatory, and logistics infrastructure while maintaining the cost efficiencies that Johor offers,” Kohe said.

Johor recently recorded 43 billion ringgit ($9.55 billion) in investments, with 21.5 billion ringgit ($4.78 billion) coming from countries such as China, Singapore, and South Korea, she said.

“With the SEZ now formalized, we expect more Chinese firms to offshore to Johor,” said Samuel Tan, CEO of Olive Tree Property Consultants, a property consultancy firm. 

BenarNews asked the Iskandar Regional Development Authority and Invest Johor for data on the number of Chinese companies planning investments in the area, but did not receive an immediate response.

The JS-SEZ’s launch comes as global supply chains shift, driven by the U.S.-China trade war. Chinese manufacturers are adopting a “China Plus One” strategy to diversify operations across Southeast Asia and avoid tariffs.

“Opening manufacturing facilities abroad allows Chinese goods to access sanctioned markets through third-party countries,” said Ahmad Mohsein Azman, an analyst at BowerGroupAsia, a business advisory firm.

However, the zone does not solely rely on Chinese investments, according to Kohe. 

“Beyond China, the JS-SEZ is attracting global interest from multinationals, private equity, and venture capital, focusing on advanced manufacturing, digital services, and sustainability to diversify investments,” she said.