Malaysia would have faced a $5-billion penalty if a China-backed rail project was axed, the prime minister said on Monday, after a deal was reached to revive the controversial scheme.

Last week, Malaysia and China agreed to push ahead with the railway at a 30 per cent lower cost, lifting a suspension slapped on the project when a corruption-plagued regime lost power in Malaysia last year.

It was among several Beijing-financed infrastructure initiatives put on hold after the change of government, as new leaders sought to reduce a mammoth national debt and amid concerns of corrupt dealings under the administration of ex-leader Najib Razak.

Malaysia and China's agreement to restart the project at a reduced cost of 44 billion ringgit ($10.7 billion) — inked in Beijing on Friday — could help improve ties which had been strained since Najib, a close Beijing ally, was ejected from power.

The 640-kilometre east coast rail link will run from northern Malaysia, near the Thai border, to a port outside Kuala Lumpur, and is seen as a key project in China's Belt and Road infrastructure drive.

Announcing further details on Monday, Prime Minister Mahathir Mohamad said that the government “was faced with the choice to either renegotiate or pay termination costs of about 21.78 billion ringgit ($5.3 billion), with nothing to show for it.

“As such, we chose to go back to the negotiating table and call for a more equitable deal, whereby the needs of the Malaysian people would be prioritised.”

He also announced that the main Chinese company in the scheme, China Communications Construction Company, would form a joint venture with a Malaysian firm to help operate and maintain the line, which would ease the burden on Malaysia.

The Chinese firm had agreed to refund one billion ringgit from a 3.1 billion ringgit advance payment previously paid by Malaysia towards the project, he said. The route of the line has been altered so it would pass through five states, instead of four, to allow more parts of the country to benefit from the railway, Mahathir said.

The completion date had been pushed back to 2026, from 2024 under the original agreement. Malaysia will still need to take a loan from a Chinese state-owned bank to fund the line but it will be less than under the original deal.

Mahathir, 93, returned for a second stint as premier in May last year after he led a reformist alliance to a surprise victory at the polls, toppling Najib's coalition which had been in power for over six decades.

Najib has since been slapped with dozens of charges over his alleged role in looting state fund 1MDB, and went on trial over the scandal this month.