CASH IS KING NAJIB: CHINA'S CLOUT SET TO GROW IN MALAYSIA AFTER HIS LANDMARK 1MDB POWER SALE

China’s $2.3 billion deal to buy power assets from a debt-ridden Malaysian government-investment fund could give Beijing greater sway in the Southeast Asia nation and pave the way for Chinese companies to win a string of coveted infrastructure deals.

State-owned China General Nuclear Power Corp. agreed to pay 9.83 billion Malaysian ringgit ($2.3 billion) in cash and take on an unspecified amount of debt for a group of power plants from 1Malaysia Development Bhd., or 1MDB.

The deal came as part of series of agreements struck between Chinese Premier Li Keqiang and Malaysian Prime Minister Najib Razak’s government, including Beijing buying Malaysian government bonds and boosting investment in Malaysia, according to China’s official Xinhua News Agency. The Southeast Asian nation’s economy has been rocked by a political scandal involving 1MDB and by low oil prices.

For China, the deal appears to offer the world’s second-biggest economy broader influence across the region, in line with the government’s “One Belt, One Road” policy.

In addition to the pledge to buy government bonds, Mr. Li expressed an eagerness for China to cut infrastructure deals in Malaysia, including building a high-speed railway linking Malaysia and Singapore, a China-Malaysia port deal and other rail projects in the country, the official Xinhua News Agency reported.

The political nature of the deal was reinforced by China General Nuclear’s decision to buy the assets. The company’s Hong Kong-listed unit, CGN Meiya Power Holdings Co., withdrew from the bidding process after making an initial approach in the deal. The unlisted, state-owned China General Nuclear has greater financial firepower and flexibility to ensure a deal would close quickly. It won’t need to seek shareholder approval or make the same disclosures as the Hong Kong-listed company. Malaysia’s tender rules had limited foreign ownership of local power assets to a minority stake, but an exception to those rules was made for the Chinese buyer, according to people familiar with the situation.

The deal with China came days after a visit to Malaysia by U.S. President Barack Obama , who spoke broadly during a town hall event about human-rights protections and civil liberties. Mr. Obama had pushed for closer ties between the U.S. and Malaysia to offset growing Chinese influence in Southeast Asia.

The Chinese state-owned firm outbid a rival offer from a Malaysian state-run power company. Tenaga Nasional Bhd., which is 30% owned by Malaysia’s sovereign-wealth fund Khazanah Nasional Bhd., wasn’t willing to offer as steep a price as China General Nuclear given the controversies surrounding 1MDB, according to people familiar with the situation.

1MDB’s travails have put Mr. Najib in the spotlight and hurt investor confidence in the commodities-exporting nation.

“1MDB is at the center of a political scandal that, with falling oil prices, has weighed on Malaysian financial-asset prices,” ING economist Tim Condon said in a note. He said he expects the sale to boost the country’s credit-default swaps, a contract that gauges a government’s ability to repay its debt.

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The deal to unload 1MDB’s energy assets may have helped lift sentiment toward theMalaysian ringgit and shares traded on the local stock exchange. On Tuesday, the ringgit rose as much as 1.4% against the U.S. dollar from its Monday close, but was recently up 1.1% at 4.2540. The Malaysian stock market ended up 0.4%.

After 1MDB bought power plants in 2012 from two Malaysian companies, it wrote down the value of the purchase from one of them, and the seller recorded a big gain on its financial statements. 1MDB said the premium it paid reflected the experience of the staff that ran the power plant.

The pending deal has been highly anticipated because it would help determine if 1MDB did overpay for the assets. The fund paid roughly 12 billion ringgit for the plants and valued them at around $4 billion in a planned initial public offering earlier this year.

After the deal, funds tied to one of the companies were donated to a charity linked to Mr. Najib, which later donated money to schools in a battleground state during a tightly fought national election, The Wall Street Journal reported in June. The 1MDB fund denied the purchases were driven by political considerations and said they made long-term commercial sense. Mr. Najib has denied wrongdoing.

‘1MDB is at the center of a political scandal that, with falling oil prices, has weighed on Malaysian financial-asset prices.’

—ING economist Tim Condon

Mr. Najib formed 1MDB in 2009 to spur growth in the Southeast Asian country, but the fund has since accumulated more than $11 billion in debt and is the focus of a series of global investigations. The 1MDB affair has embroiled Mr. Najib in Malaysia’s biggest political controversy in years.

Political rivals to Mr. Najib criticized 1MDB for overpaying for the assets and losing money.

Tony Pua, a member from the opposition Democratic Action Party said in a statement that 1MDB spent 12.1 billion ringgit to acquire the power companies, which came with about 8 billion ringgit of legacy debt.

“Now 1MDB desperately sold its power companies for 9.83 billion ringgit, clocking in 2.27 billion ringgit of losses,” he said.

1MDB wouldn’t comment on the valuation of the assets or whether it had a gain or loss on the transaction.

Xinhua News Agency quoted Mr. Li as saying that China would also grant a 50 billion yuan ($7.8 billion) quota to Malaysia under the Renminbi Qualified Foreign Institutional Investor program, known as RQFII, to boost trade and investment between the two countries. - WSJ