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.