China is eagerly shelling out money in a RM43 billion (S$14 billion) habour in Malacca, which aims to overtake Singapore as the largest port in the region.

Most of China’s trade passes through the Malacca Strait, including 80% of its energy trade, and the “Malacca Dilemma” has been on China’s agenda since 2003.

Named the “Melaka Gateway”, the joint venture is part of a wider alliance between the Malaysian and Chinese government, who have become close friends in recent years and have increased bilateral trade and boosted shipping and logistics between the two countries.

Chinese firm Guangxi Beibu International Port Group owns 40% of the Kuantan port hosting the Gateway. It also happens that the port facest he disputed waters of the South China Sea. Coincidentally, Guangxi Beibu also owns 49% of the Kuantan Industrial Park in Pahang, the home state of Malaysian prime minister Najib Razak.

The Malaysian government, Malaysian firm KAJ Developments and Chinese energy conglomerate PowerChina International will form a joint venture and reclaim land on three islands off Malacca’s coast. The Gateway is expected to be completed in 2025, but the port itself will be ready by 2019. Malaysia hopes this port will attract the bulk of the 100,000 vessels, most of them Chinese, who ply the Malacca Strait each year.

Singapore’s port is also expanding, and players are worried about oversupply and competitive cannibalization.

A World Bank study commissioned by the government last year showed a new port on Malaysia’s west coast is not necessary, as existing facilities have yet to reach capacity, according to sources. Both operators at Port Klang – Westports and MMC – have also made expansion proposals that would double the port’s capacity, the sources added.

“Because there seems to be no logic to the Melaka deal, many are questioning if this has more to do with military rather than commercial interests,” a logistics expert said.

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