A deal for a Chinese state-owned company to help bail Malaysia out of a multi-billion-dollar financial scandal fell apart on Wednesday after the Chinese government refused to authorise the investment.
China Railway Engineering Corporation and a local Malaysian partner had agreed in December 2015 to take a 60 per cent stake in Bandar Malaysia, a major residential and commercial real estate project in Kuala Lumpur that originally was being developed by 1Malaysia Development Berhad, a Malaysian state fund.

The deal, valued at 7.4 billion ringgit ($2.3bn), was a cornerstone of efforts by Malaysia’s government to sell off 1MDB assets after the fund ran up more than $US13bn ($17.5bn) in debt. The fund is now the centre of major corruption probes in several countries, ­including by the US Justice Department.

The China Railway consortium was unable to meet criteria under the December 2015 agreement to complete the sale, according to a statement by TRX City Bhd, a company owned by Malaysia’s Finance Ministry, which in turn owns the 1MDB fund. It didn’t give details.

The China Railway consortium, which also included Malaysia-based Iskandar Waterfront Holdings, confirmed in a statement that it had received a “notice of termination” from TRX City. The consortium said it was reviewing the termination with its legal adviser.

TRX City’s press release “does not fully and accurately reflect the circumstances and conduct of the parties in this matter,” the statement said.

The failure of the deal is a blow to Malaysian Prime Minister Najib Razak, who set up 1MDB in 2009 with the stated goal of developing Malaysia’s economy, and headed its board of advisers. At the time of the deal, in a New Year’s message to Malaysians, he heralded it as “the final major milestone in the 1MDB rationalisation plan”.

The 1MDB fund hasn’t published financial statements for 2015 or 2016, so its current financial situation is unclear, Still, the deal’s failure is likely to add to pressure on Mr Najib, who also is finance minister, to find other ways to pay 1MDB’s debts.

The Prime Minister’s office and 1MDB didn’t respond to ­requests for comment.

An internal Malaysian Finance Ministry document on problems with the sale, viewed by The Wall Street Journal, said a major reason for its failure was that China’s government declined to give the green light for China Railway to make the investment. A person familiar with the matter confirmed this. The Chinese government’s information office didn’t immediately comment.

The Finance Ministry document says that the consortium of buyers was given 12 extensions, with the last expiring on April 30. TRX said in its statement that the Finance Ministry will now retain ownership of the site and begin seeking expressions of interest from possible developers.

The US Justice Department, in lawsuits filed last summer, alleged over $US1bn in assets — including US properties, a Hollywood movie company and a private jet — were bought with money stolen from 1MDB. The fund denied wrong­doing and said it is co-operating with authorities.

The lawsuits also alleged Mr Najib received hundreds of millions of dollars in 1MDB money via a web of offshore shell companies. The Prime Minister has denied wrongdoing. Malaysia’s Attorney-General has said the money was a donation from Saudi Arabia and most of it was ­returned, and cleared Mr Najib.

Several probes, including in Switzerland, Singapore and Luxembourg, into 1MDB are ongoing. Malaysia’s government has closed most of its probes into 1MDB without finding wrongdoing.

Last week, 1MDB and a former business partner in Abu Dhabi, International Petroleum Investment Co, struck a deal to avoid ­arbitration over part of the missing money. The Malaysian fund said it transferred $US3.5bn to IPIC between 2012 and 2014, but the Abu Dhabi fund said it never received the money. The two sides agreed to negotiate over the missing funds over the next several years.

1MDB also agreed to pay IPIC $US1.2bn it separately owed for a loan and other money due by the end of the year.

In 2015, 1MDB rushed to announce its deal to sell the Bandar Malaysia land so Mr Najib could include it in a New Year’s message, said a person familiar with the matter.

“Now it’s time for us to await the outcomes of the inquiries into the company to take note of any lessons that need to be learned and to move on together in a constructive manner,” Mr Najib said at the time.