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Better understanding of Chinese investment and loans in Indonesia is needed.

Understanding the benefits of Chinese-Indonesia economic partnerships ahead of Indonesia’s presidential election

Indonesia’s presidential election on April 17 is only weeks away. One hot topic debated between supporters of two candidates – incumbent President Joko “Jokowi” Widodo and Prabowo Subianto – is the former’s seeming economic pivot to China. The Prabowo camp has criticised Jokowi’s decision, arguing it is a serious threat to Indonesia’s sovereignty and economic sustainability.

As a researcher on the political economy of East Asia, I argue that the Indonesian public’s perception of China’s politics has clouded the economic benefits from China’s investment and loan projects in Indonesia. During the election campaign, the issue of China has been politicised further. It has somewhat eclipsed the benefits Indonesia gains from partnering with China.

Building an industrial park

One example of how partnering with China could support Indonesia’s economy is China’s investment in building the Morowali Industrial Park in Central Sulawesi to increase Indonesia’s stainless steel production.

For decades, the Indonesian government have been wanting to convert more of its natural resources, including nickel – a raw material for stainless steel – into higher-value products, rather than selling them raw.

But to do this Indonesia needs to build processing plants, which require huge investment. This is where investment from Chinese firms with big capital and good reputation in the industry can play a role.

The Morowali project is a joint venture between Shanghai Decent Investment Group, China’s leading company for nickel and stainless steel, and Indonesian company Bintangdelapan Mineral.

The US$980 million project is expected to help Indonesia increase its stainless steel production from 2 million to 3 million tons per year. The Morowali project is also expected to pave the way for Indonesia to become a producer of lithium batteries to support its local electric car industry.

Negative sentiments towards China

The Morowali project is just one example. Indonesian state-owned mining holding company Inalum and diversified miner Aneka Tambang have set up a joint venture with China’s biggest aluminium producer, Chalco, to build a processing plant in Mempawah, West Kalimantan.

Expected to be completed in 2019 and to produce 1 million tonnes of aluminium per year, the plant will enable Indonesia to integrate upstream and downstream by using efficient technology.

But despite the potential economic benefits, the Indonesian public still has a negative view of economic partnership with China. The government had to refute rumours that were circulating on social media about massive recruitment of foreign workers.

This negative sentiment dates back to the 1960s when the military in Indonesia crushed the Indonesian Communist Party and its affiliates when they attempted to overthrow the government. The military believed China supported the failed coup.

This has soured the bilateral relationship between the two countries ever since.

Under Soeharto’s regime following the failed coup, the stigma against China and Chinese-Indonesians flourished. This regime gave birth to various negative stereotypes attacking ethnic Chinese, including accusing them of being economic exploiters. Such perceptions still loom large in Indonesia’s socio-political imagination.

This strong stigma against China explains why many are still against Chinese investment in Indonesia. These critics view China’s investment as belligerent forces with the potential to control Indonesia, if not preparing for a communist takeover.

In fact, China is no longer a communist regime as we understand the term in the West or as we read from Indonesia’s history books. Rather than taking communism as their ideological approach, Chinese state firms adopt a market-driven mechanism to help them go global.

Some of China’s big state firms engaged in infrastructure projects, like the world’s largest coal miner China Shenhua Energy and China Communications Construction, have transformed into joint-stock or limited liability companies. These firms have gone public and been listed on stock exchanges.

Debt trap?

Apart from suspicion about “invasion” of foreign workers in joint ventures with China, the Indonesian public also seems to worry that the country will fall into a debt trap with China.

They fear that if Indonesia cannot pay its debt, China will take over Indonesia’s infrastructure projects – as happened in Sri Lanka’s Hambantota

Sri Lanka is a different case from Indonesia. The ratio of Indonesia’s external debt to Gross Domestic Product (GDP) is around 30%, much lower than Sri Lanka’s 77.6%.

Most debt deals between Indonesian and Chinese partners are in the private sector. If the deals involve state firms, they are made in contracts that will not harm the state budget. Should any risks emerge, the government is fully exempt from business debt liability.

Indonesia does have loans from China. But the amount is small compared to its debt to Japan, its biggest creditor. Indonesia’s debt to China by the end of 2018 amounted to US$1,592 million. During the same period, Indonesia owed Japan US$12,908 million, or eight times more than Chinese loans.

Bilateral economic partnerships are not without problems. While myriad challenges surround economic partnerships between Indonesia and China, it is important to make a proper critical assessment of the economic engagement, which has been frequently overplayed and politicised. Currently, the majority of public discussions on China’s investment and loans in Indonesia are being politicised to the point that this could block the growth of Indonesia’s economic potential.

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