Malaysia relaxes foreign investment rules

KUALA LUMPUR, Malaysia - Malaysia took a big step Tuesday to liberalize its economy, relaxing a host of restrictions on foreign investment, including a controversial rule requiring businesses to be partly owned by ethnic Malays.

Prime Minister Najib Razak announced that listed companies will no longer be forced to allocate 30 percent of their equity to Malays — a requirement that's long been part of an affirmative action program for the country's ethnic majority.

Najib said the rule was neither benefiting poor Malays nor was it sustainable amid the global economic slowdown, which will drag Malaysia into its first recession in a decade. The economy is expected to shrink by up to 5 percent this year.

"The world is changing quickly and we must be ready to change with it or risk being left behind," Najib told an investment conference organized by Malaysia's stock exchange.

"It is not a time for sentiment or half measures but to renew our courage and pragmatism to take the necessary bold measures to advance the national interests for the long term benefit of all Malaysians," he said.

The removal of the 30 percent Malay ownership requirement for listed companies does not apply to "strategic industries" such as telecommunications, water, ports and energy.

Listed companies will still be required to sell at least 25 percent of their shares to the public, and half of those public shares must be sold to Malays so that ordinary people from the community get to participate in businesses.

Even so, Najib will have to walk a political tightrope by diluting what's known as the "New Economic Policy." It provides a host of privileges in business, education, jobs and property ownership to the Malays who make up 60 percent of the country's 28 million people.

Chinese and Indian ethnic minorities have long chafed against the decades-old program, which Najib has begun dismantling since taking office April 3. Even many Malays have protested, saying it mainly enriches elite Malays with connections in high places.

Stephen Hagger, an analyst with Credit Suisse, said the liberalization doesn't give Malaysia any competitive edge immediately but it will allow the country to play catch up with the rest of the region.

"Going forward, it's going to be equally tough but Malaysia will be less handicapped than it was before," he said. Najib however, risks a backlash from his Malay supporters, he warned.

Najib later told reporters that the NEP has failed to meet its target of raising the Malay share of corporate wealth to 30 percent by 2010. It stands at 19 percent now.

He stressed the government still wants to meet the target by reforming the system and creating a new investor-friendly economic model.

"We will help the best and the good in business. We want to be fair to all communities. No one must feel marginalized ... It is a tricky balancing act but it is doable," he said.

Among other steps in the liberalization, stock brokers and unit trust management companies will be allowed 70 percent foreign ownership, up from the current level of 49 percent. Foreigners can also own 100 percent of fund management companies, Najib said.

The liberalization moves take away most powers of the Foreign Investment Committee, an omnipotent government body that has been the bane of foreign investors.

The FIC has been derided as an impediment in Malaysia's efforts to become competitive against regional rivals such as Singapore, China and India in attracting investment by imposing various restrictions.

Foreigners will also not be required to get the FIC's approval before buying property in Malaysia, either residential or commercial.

"We can only achieve high income by creating more opportunities for growth rather than protecting our narrow turf," Najib said. "We can only achieve our social equity goals by expanding the pie."

The government also plans to set up a private equity fund with an initial capital of 500 million ringgit ($143 million) to buy private companies and hand them over to Malay managers. The fund will be enlarged to 10 billion ringgit ($2.8 billion) with no fixed time frame.

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