The largest economy in Southeast Asia has over the years increased its debt to China and has begun to increase the use of the Chinese yuan in its foreign transactions. Indonesia must be careful to avoid the experience of Sri Lanka, which lost the majority of its control over a port in Colombo to China due to debt defaults.
Indonesia must also limit its dependence on China to retain its ability to secure its territory in the South China Sea, which China claims as its own.
Indonesia’s growing relationship with China
China has become the largest investor in Indonesia under President Joko “Jokowi” Widodo, through massive infrastructure projects under the Chinese Belt and Road Initiative (BRI).
Marking the 70th anniversary of bilateral relations between Indonesia and China, both countries agreed this year to expand their ties not only in the areas of investment and trade but also in the field of culture. The latest area of co-operation is health.
Beijing has pledged to boost co-operation with Indonesia in fighting the coronavirus. This includes backing Indonesia as a hub for vaccine production.
The growing roles of China in Indonesia have led some scholars to believe the latter has become very reliant on the former.
Indonesia’s debt to China stood at US$17.75 billion in 2019, an 11% increase on the figure in 2017.
Given this substantial debt, which is expected to increase with the implementation of BRI projects, many fear this will put Indonesia at risk of debt defaults like Sri Lanka when it failed to pay its loan.
Sri Lanka built the US$1.3-billion Hambantota port with loans from Chinese companies China Harbour Engineering Company and Sinohydro Corporation. The port opened in 2010, but the Sri Lankan government has struggled to repay the debt with the project incurring heavy losses. Along with loans taken out for other infrastructure development projects, Colombo now owes China a total of US$8 billion.
The Sri Lanka story leads to speculation that China is engaging in “debt-trap diplomacy” by extending excessive credit with the alleged intention of extracting economic or political concessions from the debtor country.
The loan requirements of BRI projects also raise concerns. The loan disbursement for any BRI project requires the country partner to buy 70% of the materials from China and to employ Chinese workers. This certainly disadvantages local industrial players.
In addition, the expected increased use of Chinese yuan in Indonesia’s foreign transactions after the signing of an agreement to promote the use of yuan and Indonesian rupiah in trade and investment transactions between the two countries is very risky for Indonesia.
In recent years, China has often devalued its currency to make it more responsive to market forces. In 2019, for example, it devalued the yuan to make Chinese goods more competitive as exporters began to feel the sting from the trade war with the US.
When the yuan is devalued, Chinese products will be cheaper and more competitive in the international market. If Indonesia uses the yuan, imported goods from China may soar, and this could hit the domestic market.
The chairman of Indonesia’s Investment Coordinating Board, Bahlil Lahadalia, has pointed out the negative consequences of Indonesia’s economic dependence on China.
He said a 1% drop in China’s economic growth would translate into a 0.3% drop in Indonesia.
Apart from the economic implications, Indonesia’s growing dependence on China has profound political impacts.
As Indonesia becomes more reliant on China, it is more difficult to counter China’s growing aggressiveness in the South China Sea.
It is reported Chinese fishing boats often trespass on Indonesian territory in the South China Sea.
Yet Indonesia’s relationship with China has prevented Jakarta from acting aggressively in the South China Sea unless it is prepared to lose its largest trading partner and one of its largest investors.
This growing dependence has also heightened anti-Chinese sentiment in Indonesia, which has been deeply rooted in Indonesia since the 19th century.
Historically, the social frictions with people of Chinese descent in Indonesia began as local people were envious of their business success. In the late 1960s, the New Order government politicised these frictions to completely abolish communist influence in Indonesia. These frictions have never ended, and the high reliance on China could make them worse.
This anti-Chinese sentiment should not be taken lightly. Affiliates of the Islamic State terrorist group in Indonesia have increased their anti-Chinese rhetoric on social media during the pandemic, using COVID-19 as a pretext to target either people of Chinese descent or Chinese expatriates living in the country.
At the same time, Indonesia’s dependence on China could hurt the country’s principle of neutrality in its foreign policy. It might tarnish Indonesia’s reputation in global politics for not upholding its principle.
What to do next?
Indonesia should reduce its dependence on China. One strategy is to diversify its international co-operation. The oil-wealthy Gulf nations, which have been eyeing Indonesia in their “Look East” policy, could be one option.
The government needs to make sure that participating in the BRI does not incur losses to avoid the mistakes made by the Sri Lankan government.
Another strategy is to renegotiate with China on the terms and conditions of these projects. We can learn from Malaysia’s relationship with China.
After being faced with an option to either renegotiate or pay termination costs of about US$5.3 billion, Prime Minister Mahathir Mohamad decided to negotiate with Beijing. Under the new agreement, the project cost has been reduced. Malaysia will still need to take a loan from a Chinese state-owned bank to fund the initiative, but it’s less than under the original deal.
Indonesia must realise China needs it more than Indonesia needs China as some BRI projects would pass through Indonesia’s vast maritime territory and China can’t carry out the projects without Indonesia’s involvement.
Yeta Purnama, a Universitas Islam Indonesia student, contributed to this article.