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Indonesia, China find love

Asia Times, 17 August 2005

Indonesia, China find love

By Bill Guerin

JAKARTA - In little over three months, Indonesian President Susilo Bambang Yudhoyono has succeeded in rebuilding trust with the Middle Kingdom and securing pledges of billions of dollars worth of foreign direct investment.

Crowds lined Beijing’s main roads, bedecked with Indonesian flags side by side with Chinese flags, all the way past the front of Tiananmen Square to the Great Hall of the People as Yudhoyono began a four-day state visit to China at the end of last month. Both countries signed a series of MoUs and agreements recording their increased cooperation in economic, defense, and cultural sectors. The visit was a follow-up to Chinese President Hu Jintao’s attendance of the Asian-African Summit in Jakarta in April and was Yudhoyono’s first visit to China since taking office last October. It coincided with the 55th anniversary of the establishment of diplomatic relations between the two countries.

History set aside
The improvement in Sino-Indonesian relations follows a long and checkered history of mistrust, suspicion, anger and resentment since 1967. Diplomatic and trade relations between the two countries were severed then, in the aftermath of what the Suharto regime said was an attempted communist coup by the PKI (the Indonesian Communist Party).

China was accused of shipping arms to Indonesian communists plotting to take power by undermining the Indonesian military. Hundreds of thousands of people, the majority of them ethnic Chinese, were butchered in an anti-communist crackdown that followed the coup. Then, three decades later, the confidence of the ethnic Chinese community in Indonesia, especially those with business ties in mainland China, was severely dented in the violence of May 1998 after then-president Suharto stepped down. An estimated US$60 billion was shifted to safety in Singapore by ethnic Chinese Indonesians.

Renewal of diplomatic ties under president Abdurrahman Wahid in 1990 heralded in a gradual improvement in bilateral relations that has continued since. The dark days of the past were finally laid to rest when Yudhoyono and Jintao signed a historical Indonesia-China Joint Declaration in Beijing on April 25.

Well fitted
Indonesia has vast resources - an estimated 9 billion barrels in oil reserves, well over 9.3 billion tons of coal and 188 trillion cubic feet of gas. Its 230 million population, endless consumer boom and substantial energy sources offer great potential for Chinese enterprises. However, despite its substantial reserves, Indonesia’s rising energy consumption and recent fuel shortages are cause for concern. Yudhoyono’s visit had been postponed because of the ongoing domestic fuel crisis.

China’s gross domestic product (GDP) is on the order of US$1.5 trillion, more than five times bigger than Indonesia’s $200 billion economy. Its massive population and blistering hot economy make it the world’s second biggest consumer of petroleum products. The US Energy Information Administration predicts China’s huge demand for oil will increase by 130% to reach 12.8 million barrels a day by 2025. China also uses up nearly half of the world’s cement production and consumes two thirds of its coal production.

This has forced China to look for secure and stable sources of basic energy needs, as well as raw materials and commodities. Its sustained growth will depend on how well it manages its political and trade relationships in the Asia-Pacific and beyond. Acquiring concessions and investing directly in natural-resource-based projects in Indonesia makes a great deal of sense for China.

Short of energy to fuel its boom, China started buying into the Indonesian oil and gas sector back in 2002. China National Petroleum Corp (CNPC), Asia’s largest oil processor, plans to invest in Indonesia’s proposed 10th oil refinery. Both CNPC and the China National Offshore Oil Corp (CNOOC) have steadily increased their investments in acquiring interests in upstream oil entities across the region, including in Indonesia.

A substantial boost in external investment was expected as China moved outward from its largely domestic investment paradigm and encouraged its enterprises to go international. It has more than $710 billion in foreign exchange reserves. Capital controls have been reduced and domestic companies can now buy foreign assets. China received $61 billion in foreign direct investment last year and has plenty of cash to spend.

The government has adopted a policy of exporting oversupply of capital through issuing soft loans and acquiring assets overseas in order to stem inflationary pressures arising from this current account imbalance. In 2003, Chinese firms pumped out $3 billion to buy foreign companies. They spent $7 billion in 2004 and may spend up to $14 billion this year.

Indonesia’s economy grew by 5.1% in 2004, and is expected to perform slightly better this year, reaching 5.5%. Growth in the first quarter of this year reached 6.4%. China invested some $6.5 billion in Indonesia in 2004 but Minister of Finance Jusuf Anwar predicts that this could soar to $20 billion within the next five years. Jakarta is now working out a list of some of the country’s 145 state-owned enterprises to be sold to investors, although many are not in good shape. Foreign investors are now allowed majority and management control when they buy into Indonesian enterprises.

Trade aspects
The closer ties between Jakarta and Beiijing have encouraged high expectations from both sides, with both countries aiming to increase bilateral trade to $30 billion annually by 2010. China is the fastest-growing export market for Indonesia though Jakarta has yet to establish a trade representative there. Malaysia already has a marketing office for crude palm oil in Beijing, and Singapore has set up a Chamber of Commerce in Beijing.

Indonesia earned $4.6 billion from exports to China in 2004, up 21% on the year before. $1.17 billion of this was in oil and gas exports. Imports, however, were also up 38% on 2003. The $4.1 billion worth of goods imported from China last year included $3.36 billion in non-oil and gas imports. Indonesia’s weak competitiveness has been exacerbated by major challenges from China. The fact that China is the world’s biggest textile and clothing exporter makes it a direct competitor with several of Indonesia’s important exports. Under former president Megawati Sukarnoputri, many export-oriented garment and footwear companies, which had helped drive Suharto’s industrial export success from the mid-1980s, closed down, resulting in widespread job losses.

Work with, not against
The country steadily lost competitiveness in labor-intensive exports but Yudhyono’s Trade Minister, Mari E Pangestu, who accompanied the president to Beijing, has pushed domestic manufacturers to improve their productivity and efficiency and raise their competitiveness. She says the new investment from China could initiate an increase in trade.

Pangestu, an ethnic Chinese economist, believes that instead of competing directly with China, local manufacturers could fit into China’s fragmented production processes by setting up Chinese-style free trade zones in existing industrial centers in Indonesia. Pangestu says the central economic objective for Indonesia and ASEAN (Association of Southeast Asian Nations) should be to adapt to the challenge and opportunity presented by China. China could also use Indonesia as a spearhead to dig deeper into the markets in the 10 ASEAN countries through the ASEAN free-trade arrangement. China’s trade with ASEAN swelled to over $100 billion dollars in 2004, up 30% in just 12 months.

But all this is in the future. James Castle, who has spent the best part of two decades in business consulting in Jakarta, pointed out to Asia Times Online that at the moment, the good news from China is "very much a work in progress with many twists and turns ahead". Indonesia’s position as the largest country and economy in Southeast Asia makes it a key focus for major powers. China’s aggressive expansion across the globe and its warming relations with Indonesia are just one example. Japan and the US also aspire to strengthen their influence in the region.

Capitalizing on this geopolitical capital, Indonesia, under Yudhoyono’s leadership, could continue to gain economic advantage from such relationships. Yudhoyono’s recent visit to Tokyo, for example, prompted the Japanese private sector to pledge investments worth $1.347 billion in Indonesia. Both countries agreed on two economic cooperation projects to boost trade and investment - an Economic Partnership Agreement (EPA) and Strategic Investment Action Plan (SIAP).

The icing on the cake for Yudhoyono will be the almost-certain boost in popular support for his administration once the Chinese FDI kicks in and helps absorb some of the vast numbers of unemployed Indonesians. "If we can increase trade ties we can create more jobs back home as well as drive the real sector and increase tax revenue, while economic growth will also rise. Thus we can also improve the education sector, health services and increase people’s purchasing power," the president said in the Chinese capital.

Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has worked in Indonesia for 20 years as a journalist. He has been published by the BBC on East Timor and specializes in business/economic and political analysis in Indonesia.

 source: Asia Times