The collapse of a deal for a Chinese state-owned company to help bail Malaysia out of a multibillion-dollar financial scandal has cast a shadow over the appearance of Malaysian Prime Minister Najib Razak at the Belt and Road Initiative summit in Beijing this weekend.

The deal between China Railway Engineering Corp (CREC) and local Malaysian partner Iskandar Waterfront Holdings to buy a 60 per cent stake in Bandar Malaysia, a major property development in Kuala Lumpur, from Malaysia’s troubled state-investment fund 1 Malaysia Development Berhad (1MDB) fell through last week, complicating Najib’s efforts to move on from a scandal surrounding the fund.

In December 2015, Iskandar, owned by Malaysian tycoon Lim Kang Hoo, and CREC had said they would pay 7.41 billion ringgit (HK$13.2 billion) for the stake.

But on Wednesday TRX City, a former 1MDB division now owned by the Malaysian finance ministry, said the deal had lapsed because the buyers “failed to meet the payment obligations”.

CREC and Iskandar have disputed that claim, saying it did “not fully and accurately reflect the circumstances and conduct of the parties in this matter.”

On Friday, in another statement, they said TRX City was aware that they had complied with conditions for the share sale agreement and that accordingly that agreement should now be “unconditional”.

“[We have] sufficient financial resources and capabilities to ensure the smooth and successful execution and implementation of the development of Bandar Malaysia,” they said.

The failure of the deal has fuelled speculation over Chinese investments in the country, complicating Najib’s trip to Beijing this weekend, when he will join other state leaders in discussing China’s Belt and Road Initiative — a Chinese-led project to link regional economies into China-centred trading network.

Has China offered to bail out Malaysia’s 1MDB? At what cost?

“If the issue eats into the bilateral relationship between us and Beijing, it will affect other major Chinese investments in this country, including the East Coast Rail Line project,” said a commentary in Sin Chew Daily, a Malaysian Chinese newspaper, referring to the proposed line that would connect Kuala Lumpur to the states of the East Coast Economic Region — Pahang, Terengganu and Kelantan.

“It is absolutely necessary for the government to provide a clear explanation on this matter before it erodes other investors’ confidence in the country,” the commentary added.

Najib had previously said that the Bandar Malaysia deal — alongside other deals with Beijing — meant that 1MDB’s biggest challenges were now behind it, but that claim now looks questionable.

1MDB had racked up more than US$11 billion in debt before beginning a restructuring programme in 2015. The fund is also the subject of money-laundering investigations in at least six countries.

1MDB has denied any wrongdoing.

While the misery at 1MDB looks set to continue for some time yet, it is still far from clear exactly what caused the Iskandar-CREC deal to sour.

Malaysian political and economics analyst Professor Hoo Ke Ping blamed the strict capital controls China has imposed since March last year.

In February, China’s central bank said its foreign exchange reserves had dwindled to US$2.999 trillion in January — putting it beneath the key US$3 trillion mark, seen by many analysts as a psychological water mark for Beijing.

China’s tightening grip on its capital controls was evident in April when the Chinese developer of the Forest City real estate project in the Malaysian state of Johor gave refunds to mainland Chinese buyers.

Is Hong Kong’s mystery yacht linked to Jho Low of 1MDB fame?

Country Garden Holdings cited the crackdown on capital outflows as the main reason for the refund.

Group vice-president Zhu Jianmin told the South China Morning Post on April 5 that this was what had halted the Forest City sales in China and that buyers who had made down payments were no longer able to transfer the rest of their payments from China.

Whatever the reason for the souring of the Bandar Malaysia deal, Hoo cautioned against exaggerating the loss to Malaysia.

He said there was little need for more property development within Kuala Lumpur as the market for commercial and residential property was oversaturated.

The Bandar Malaysia project was slated to be Malaysia’s transport hub — housing the Kuala Lumpur-Singapore High-Speed Rail, Mass Rapid Transit lines, the Keretaapi Tanah Melayu Komuter alongside the Express Rail Link and 12 major highways.

* With Reuters