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Analysis: Singapore, Malaysia warming to each other

By Jason Szep

SINGAPORE, Oct 10 (Reuters) - The imposing 72-year-old railway station in the heart of Singapore's business district evokes a forgotten era. Ceiling fans twirl overhead. Tiled mosaics of Chinese junks and coconut plantations line its walls.

It is also a source of irritation to Singapore's rulers: its 18 hectares (45 acres) of prime real estate belong not to the wealthy city-state but to Malaysia - a monument to the historic rivalry between the Southeast Asian neighbours.

The outpost is Malaysian territory under a pact reached when the two were linked under British colonial rule. The station's signs are still written in the Bahasa Malay language. Its workers are mostly ethnic Malay. Malay food steams in its cafeteria.

The ultra-modern city has grown around it, a highway overpass nearly clipping it on one side, sleek office towers on another.

"This is Malaysia. Look around," said 62-year-old money changer Sahib Yahya, who began work at the station in 1960, five years before Singapore seceded from an independent Malaysia. "There is very little that has changed here."

Yet change, at last, may be in the air.

Leaders from both countries are signalling a new era of economic cooperation that political analysts say could accelerate talks on a long list of festering disputes that date back to independence, including sovereignty over the railway land.

Underlining the new conciliatory tone, a large "Welcome to Malaysia" sign at the station was recently taken down.

"The bottom line here is you have a much more pragmatic administration in Malaysia. There is an attitude on both sides of 'let's talk, let's move on, because if we don't China and India could swamp us'," said economist Song Seng Wun of brokers GK Goh.

In his first visit to Malaysia since taking power in August, Singapore Prime Minister Lee Hsien Loong met his Malaysian counterpart, Abdullah Ahmad Badawi, last week. Both pledged to improve business ties and to tackle terrorism and other issues together.

It was the latest in a list of ministerial-level contacts since last year when Abdullah replaced veteran leader Mahathir Mohamad, who often seized on tension with Singapore to rally support at home. Mahathir seldom met Singapore's leaders.

"Personalities are very important," said Malaysia's ambassador to Singapore, N. Parameswaren. "What could not have happened before is beginning to happen now."

BUILDING UP INVESTMENTS

The question is where to go from here. Banks are sizing up the opportunities, and Malaysia's banking system, telecoms sector and transport links are seen as particularly ripe.

Singapore state investment agency Temasek Holdings has already snapped up 15.4 percent of Malaysian Plantations Bhd (MPBM.KL), whose main asset is Alliance Bank Bhd, in the first major investment in a Malaysian bank by Singapore's government.

Air transport may be further liberalised. The lucrative route between Singapore and Kuala Lumpur could be opened up to greater competition, industry analysts say, after both leaders expressed an interest in seeking more flights and routes.

"The climate has clearly improved," said K.S. Nathan, a fellow at the Institute of Southeast Asian Studies.

Under Mahathir, investments by the state-linked corporations that dominate wealthy Singapore were held hostage to progress on tougher bilateral disputes, such as the price that resource-poor Singapore pays for Malaysian water.

Bickering was common, and ties deteriorated in 1997 when Lee's father, Singapore's modern founder Lee Kuan Yew, infuriated Mahathir by describing Malaysia's southern Johor Bahru state as "notorious for shootings, muggings and carjackings".

"You don't see these types of hyperbolic statements made by either side any more, or through the media," said Nathan. "It seems they do not see any political mileage in doing that."

NEW REALITIES

The fence-mending partly reflects new economic realities, as the cheap labour and rising wealth of fast-growing China and India siphon foreign capital from Singapore and Malaysia.

As China booms, foreign direct investment in Southeast Asia has crumbled to 1.9 percent of the region's total economic output, the lowest in a decade and just half of what China receives, say economists at brokers CLSA Asia-Pacific.

The neighbours are also paying a price for having failed for decades to capitalise on a common history and culture. Many families have kin on both sides of the border. About 200,000 people cross a causeway linking the countries each day.

Singapore is already Malaysia's second-largest export market and top trading partner. Their two-way trade of $45.8 billion last year represented about half of trade within the 10-state Association of South East Asian Nations (ASEAN).

Lee has appointed his predecessor, Goh Chok Tong, to negotiate the tougher bilateral rows. Some worry that progress could stall once talks move down from prime ministerial level, and even designating Malaysia's foreign minister to talk to Goh could mean hard issues go untackled.

Two of the most emotional issues - sovereignty over a tiny island called Pedra Branca and a Singaporean land reclamation project opposed by Malaysia - have gone to international courts. But a list of others remains.

"The relationship has gone through all kinds of vicissitudes in the past," said the ambassador, Parameswaren. "We have come to a common understanding." (Additional reporting by Mark Bendeich in Kuala Lumpur) ($1=1.686 Singapore Dollar).

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