* Malaysian govt starts corruption crackdown
* Ex-leader of second largest govt party charged
* PKFZ bonds trade wide of sovereign despite guarantee
By Razak Ahmad
KUALA LUMPUR, July 29 Malaysia's government charged a veteran ethnic Chinese politician with graft on Thursday in a corruption case that has worried bondholders and tarnished the country's investment image.
Ling Liong Sik, 66, is a former transport minister and led the Malaysian Chinese Association (MCA), the second largest party in the ruling coalition, for 17 years.
Ling was charged with two counts of corruption for his involvement in a free trade zone at Malaysia's largest port, Port Klang, whose cost has ballooned five-fold to 10 billion Malaysian ringgit ($3.13 billion).
Ling pleaded not guilty to both counts.
The port project was started by Ling, although most of the problems, including concerns about whether bondholders would be repaid, surfaced after he stepped down as transport minister.
Bonds from the special purpose vehicles used to finance the project were sold with a government guarantee that turned out to be fake, angering holders some of whom are overseas investors.
A 3-year bond issued by one of Port Klang's special purpose vehicles trades more than 600 basis points wider (cheaper) than a 3-year Malaysian government bond MY3YT=RR.
Prime Minister Najib Razak was questioned about the issue by fund managers when he sought to promote Malaysia as an investment destination on a visit to New York last year.
GOVT SERIOUS ABOUT TACKLING CORRUPTION?
Last year, Najib promised to prosecute any wrongdoing with regards to the port project and this move could be an attempt to show investors that the country is serious about tackling corruption. [ID:nKLR353713]
Malaysia's ranking dropped to a record low of 57th in anti-corruption body Transparency International's 2009 report.
At the same time, foreign direct investment has fallen off a cliff to 3.5 percent of the total going into Southeast Asia in 1999 from an average of over 21 percent annually from 1990-2000, according to United Nations data.
"This is part of an effort by Najib to address Malaysia's Anti-Corruption Commission credibility deficit, especially among Chinese, and win reform points. A decision of this nature is definitely reviewed at the top," said Bridget Welsh, a Malaysia expert at Singapore Management University.
Malaysia charged a serving minister in 2004 when former Land and Cooperative Development Minister Kasitah Gaddam was charged with corrupt practice and cheating in 2004.
He was acquitted in 2009. ($1 = 3.193 Malaysian Ringgit) (Additional reporting by Niluksi Koswanage; Writing by Royce Cheah; Editing by David Chance and Sugita Katyal)