* Mahathir says that Forest City cannot be sold to foreigners
* He says Malaysia will not give people visas to live there
* Country Garden Pacificview seeks clarification from PM
* Forest City seeks image that is more Malaysian, less Chinese
* Project also hit by Malaysia gov't delay of high-speed rail link (Updating with Country Garden share price)
By Fathin Ungku and Joseph Sipalan
FOREST CITY/KUALA LUMPUR, Malaysia, Aug 27 (Reuters) - M alaysian Prime Minister Mahathir Mohamad on Monday declared that foreigners will not be granted visas to live in the giant Forest City real estate project on the country's southern tip, a major threat to the marketing strategy for the development. It is not his first broadside against the plan by Chinese developer Country Garden Holdings Co to create a new city that was envisaged to eventually house 700,000 people on reclaimed land near Singapore, but it could be his most damaging. The company has been targeting foreigners more than Malaysians for sales of the apartments.
A top official at the project told Reuters last week that in the weeks immediately after 93-year-old Mahathir came back into power, through a shock election victory in May, demand for the apartments had weakened, and that the uncertainty remained a concern.
Mahathir's latest comments are likely to exacerbate those concerns.
"One thing is certain, that city that is going to be built cannot be sold to foreigners," Mahathir said at a news conference on Monday in Kuala Lumpur in response to a question from Reuters. "We are not going to give visas for people to come and live here."
Mahathir, who was Malaysia's leader from 1981-2003, said the government's objection was "because it was built for foreigners, not built for Malaysians. Most Malaysians are unable to buy those flats."
Country Garden Pacificview Sdn Bhd, the joint venture between Country Garden and the Johor state government that is developing Forest City, said in a statement it is in touch with Mahathir's office as it seeks clarification. It said it believed Mahathir's comments "may have been taken out of context in certain media reports" as they do not correspond with the content of a meeting between the prime minister and Country Garden Holdings Chairman Yeung Kwok Keung.
In that meeting on August 16, Mahathir "reiterated that he welcomes foreign investments which could create employment opportunities, promote technology transfer and innovations that could benefit Malaysia's economic growth and job creation," Country Garden Pacificview said.
It also said that it has complied with all Malaysian laws and regulations concerning approvals to sell to foreign purchasers.
Shares in Hong Kong-listed Country Garden, which rose as much as 3.9 percent on Monday morning, trimmed their gains to 2.5 percent after Mahathir's comments.
Country Garden Chinese buyers now make up about two-thirds of the owners of the Forest City apartments that have been sold so far, with 20 percent from Malaysia and the rest from 22 other countries including Indonesia, Vietnam and South Korea.
Mahathir had capitalised on popular disquiet about Chinese investment pouring into Malaysia during his election campaign. He even suggested in a speech last December that he hoped Forest City would become an actual forest with baboons and monkeys as residents, according to local media reports.
Since becoming prime minister he has put the brakes on a number of China-backed projects, including the $20 billion East Coast Rail Link project and a natural gas pipeline project in Sabah. Plans for a high speed rail link from Kuala Lumpur to Singapore, which was expected to be a big boost to the Forest City project, have also been suspended.
Forest City's sales have picked back up in recent weeks, and the developer has been seeking to change the project's image. Country Garden is trying to make it appear more Malaysian and less Chinese, according to the official, Ng Zhu Hann, who is head of strategy for Country Garden Forest City.
Country Garden is also willing to acknowledge for the first time that if demand does falter it will have to slow down the building of the development. It is eventually intended to be a $100 billion city, with apartment blocks, houses, office towers, hotels and shopping centres on four man-made islands.
"If the demand is there, we will build. If it's not there, we will slow down," Ng said in an interview at the gleaming Phoenix Hotel, one of the finished new structures on the first of the reclaimed islands. "So there's no worry of a ghost town, oversupply - If the demand is not there, we won't be building."
Mahathir's victory is the second big threat that the development - which is a partnership between Country Garden and the Sultan of Johor - has faced in the past couple of years. Beijing's moves to stem capital outflows imposed after the yuan plummeted in late 2016 hurt mainland Chinese demand for the apartments.
Ng said what he called the "Chinese Stigma" is the biggest hurdle facing the project.
"What the Malaysian government does not want is a Chinese enterprise coming to Malaysia, taking government contracts, affecting the project opportunities of local developers, making the money and going back," Ng said.
This has prompted a change in hiring strategy as Forest City seeks to recruit more Malaysians like Ng into senior management positions.
"My predecessor was a Chinese. In the past, our management had only one Malaysian, which was head of legal. This (my) position is usually held by a Chinese, but now I'm here," said Ng, who is ethnic Chinese but from Malaysia.
Ng said that the political uncertainty had hurt investor sentiment.
"It's not that people don't want to invest, but people are now: 'Let's wait and see. What if they change their policy again?' Political stability is one, policy stability is another."
After Mahathir's comments, Ng defended the local nature of the project.
“There are many Malaysians in this project,” Ng told Reuters. “1,100 out of 1,545 of the total workforce are Malaysians."
At the end of a thirty-minute drive from the crossing from Singapore through palm oil plantations and jungle, the once sleepy town of Gelang Patah known for its mangroves and fishing villages now has a skyline of skyscrapers.
This futuristic development is only half of the first of four man-made islands envisioned for the development - only 2.7 square kilometres of the planned reclamation of 20 square kilometres.
Work to build more high rise residential towers, town houses and commercial buildings is continuing full steam, with dozens of heavy duty trucks carrying sand and materials while cranes dot a skyline that is growing taller and denser as high-rise apartments rapidly approach completion.
Forest City is barely inhabited, with only a handful of staff living at its service apartments and guests at its hotel.
But earlier this month, an international school opened its doors to the first 60 students - mostly from China and also from South Korea - to its 22-acre campus planted with "vertical gardens," an Olympic-size pool and three yoga studios.
They will be knocking about the Shattuck St Mary's school campus designed to accommodate 1,000 students as construction roars on in the backdrop.
Liang Ri Sheng, 44, who runs an electrical services company in Guangzhou, said he hopes Forest City will be the gateway for his son to an international life, riding on the strength of China's Belt and Road regional infrastructure push.
"It will give both eastern and western exposure for my son. I think it's good for my son's growth and development," Liang told Reuters. He was speaking before Mahathir's latest remarks.
His family will be one of the first 482 to get the keys to their new homes by September.
Another buyer, Jackie Chan (not related to the actor of the same name), who bought an apartment in Forest City last year for around $140,000, said he hadn't expected such a twist.
"When I bought it I was betting on long-term appreciation and didn’t expect there would be such a policy risk. But I’m not aiming for their immigration visa so there’s no impact for me. The investment amount is small so I’m just going to keep it as a vacation home," said Chan, who lives in Hong Kong.
Reporting by Fathin Ungku and Joseph Sipalan Additional reporting by Aradhana Aravindan and Clare Jim Editing by Jack Kim and Martin Howell