Strategic Analysis: Chinese Business Activity in Indonesia (Abstract)

Under both the pre­vi­ous Pres­i­dent, Susi­lo Bam­band Yud­hoy­ono (2005 to 2013), and his suc­ces­sor and cur­rent Pres­i­dent, Joko Wido­do, Indone­sia has avoid­ed con­fronta­tion and sought to remain removed from sim­mer­ing region­al con­flicts, most notably those involv­ing dis­put­ed ter­ri­to­ries in the South Chi­na Sea. This peri­od has seen dra­mat­ic growth in the lev­els of bilat­er­al trade and invest­ment (although Chi­na still lags behind Japan).

It is also true, how­ev­er, that Indone­sia has a healthy skep­ti­cism toward promised Chi­nese invest­ment, with sta­tis­tics putting Chi­nese fol­low through on its pledged invest­ments at only 7% (since 2005), com­pared to Japans 62%. For most of Pres­i­dent Wido­dos pres­i­den­cy, how­ev­er, many ana­lysts have inter­pret­ed his pur­suit of Chi­nese invest­ment as a lean towards Bei­jing, arguably reflect­ed in the selec­tion of Chi­na over Japan for the Jakar­ta-Ban­dung high-speed rail project amidst his admin­is­tra­tions thirst for for­eign invest­ment at a scale nec­es­sary to real­ize his economic/political ambi­tions.

Only recent­ly (in mid-2016), how­ev­er, Wido­dos efforts to remain neu­tral on Chi­nese provo­ca­tions (par­tic­u­lar­ly with regard to the South Chi­na Sea) have been severe­ly com­pro­mised by Bei­jings con­tin­ued encroach­ment in the region, now seem­ing­ly stretch­ing into the waters around Indone­sias Natu­na Islands. A pos­si­ble rift sim­mers between Chi­na and Indone­sia over the con­fus­ing lack of recog­ni­tion by Bei­jing of Indone­sias rights to an Exclu­sive Eco­nom­ic Zone (EEZ) around these islands that Chi­na has open­ly acknowl­edged belong to Indone­sia. Fur­ther, Chi­nese fish­ing boats have increas­ing­ly encroached on these waters, backed by Chi­nese mil­i­tary patrol ves­sels, putting pres­sure on Indone­sian lead­er­ship to take a stronger posi­tion in response.

Despite the many suc­cess­ful efforts of Chi­na to gain strate­gic advan­tage with­in Indone­sia from an eco­nom­ic and finan­cial per­spec­tive, this momen­tum may be put at risk by these recent actions and the polit­i­cal posi­tion that Pres­i­dent Wido­do has carved out for him­self as an eco­nom­ic nation­al­ist and a defend­er of Indone­sias trea­sured mar­itime assets. Until recent­ly, he had man­aged to bal­ance two cen­tral con­cepts to his pol­i­tics: 1) a more nation­al­ist eco­nom­ic agen­da with­in his par­ty; and 2) seek­ing good rela­tions with Chi­na in the hopes of attract­ing need­ed for­eign invest­ment. These two poli­cies are now com­ing into con­flict.

Still, many ana­lysts believe Indone­sia will con­tin­ue its lean toward Chi­na, par­tic­u­lar­ly giv­en its embrace of AIIB and its expec­ta­tions that the Chi­nese-led bank will be a lucra­tive and prac­ti­cal financ­ing vehi­cle for lead­er­ships ambi­tious devel­op­ment agen­da, as laid out in his Nawa Cita eco­nom­ic plan. In mid-2015, for exam­ple, Pres­i­dent Wido­do stat­ed that Indone­sia need­ed more than $400 bil­lion in such invest­ment over the next five years, specif­i­cal­ly to reju­ve­nate the coun­trys ports (includ­ing con­struc­tion work on some 24 dif­fer­ent sea­ports) as well as devel­op new infra­struc­ture projects, pow­er gen­er­a­tion capac­i­ty and rail­ways. Wido­do appears to see the agen­da of the AIIB and Chi­nas ambi­tious One Belt, One Road project as align­ing in a very tempt­ing fash­ion with his own domes­tic eco­nom­ic agen­da and polit­i­cal lega­cy.

 

Excerpted Deals and Transactions:

  • Chi­na has demon­strat­ed a keen inter­est in build­ing ports along the Malac­ca Strait involv­ing com­pa­nies also involved in Chi­nas island-build­ing efforts in dis­put­ed parts of the South Chi­na Sea, includ­ing CCCC Dredg­ing and Chi­na Har­bour Engi­neer­ing Com­pa­ny, which are both involved in the con­struc­tion of Kuala Tan­jung Port.
  • CCCC signed a $2.5 bil­lion deal with Indone­sian Port Cor­po­ra­tion Pelin­do II to devel­op 35 ports along east­ern Indone­sia. The deal cen­ters on a $500 mil­lion con­tract to build a trans­ship­ment con­tain­er hub at Sorong Port in West Papua, which would serve as a stop­ping point for ship­ping routes between Aus­trala­sia, Chi­na, and North­east Asia.
  • In Novem­ber 2011, CDB, ICBC, Chi­na Agri­cul­tur­al Bank and Chi­na Exim Bank signed a deal to loan $1.3 bil­lion to fund the 300 km coal rail­way in South Suma­tra. The rail­way was to stretch from Tan­jung Enim to Ban­dar Lam­pung at a cost of some $5 bil­lion. The rail­way was intend­ed to bring a trans­port net­work to the abun­dant coal resources through­out South Suma­tra
  • Sinopec pur­chased 95% equi­ty for $850 mil­lion in West Point Ter­mi­nal, which will be the largest oil stor­age ter­mi­nal in South­east Asia
  • August 2014, Chi­na Machin­ery Engi­neer­ing Cor­po­ra­tion signed a deal to devel­op the $5 bil­lion Ban­taeng Indus­tri­al Park in South Sulawe­si, in close prox­im­i­ty to the strate­gi­cal­ly posi­tioned Makas­sar Strait. The park will focus on the man­u­fac­tur­ing of nick­el and iron, and will also see the devel­op­ment of a $300 mil­lion deep-water port to export man­u­fac­tured goods.