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Is Chinese Business a Key Pillar for Indonesia’s Economy? ?

Although China planned to invest $18.4 billion in Indonesia in the last five years, its investment hasn’t been as significant as its trading activities with the archipelago. 

“Ours has become one of the most dynamic and influential bilateral relationships in the Asia-Pacific region,” said Chinese president Xi Jinping to The Jakarta Globe in November. Indeed, both economies have enjoyed growing trade and investments with one another in the past decade, and it’s likely the bond will grow stronger in the coming years.

Indonesia is projected to be the world’s seventh biggest economy by 2030, according to global management consulting firm McKinsey & Co. By this time, China will have become the largest. It’s true, both nations are riding a mutually beneficial business relationship which has been running for around 64 years.

As Chinese New Year is upon us, Indonesia Expat takes the chance to highlight three key to know about between China and Indonesia.

There is a growing trade imbalance in favour of China

Over the past decade, China has grown to become Indonesia’s biggest trading partner in Asia, surpassing Japan, Singapore, and South Korea. In that same timeframe, China has managed to turn the tables on its trade deficit. In 2003, China imported a total of US$3.8 billion worth of goods from Indonesia. On the other hand, Indonesia imported just US$2.96 billion from China. The same year, China recorded a trade deficit of US$0.84 billion. Fast forward to 2013, Indonesia exported US$22.60 billion worth of goods to China but imported a whopping US$29.85 million. This means that China enjoyed US$7.25 billion trade profit that year. Although the 2014 numbers aren’t in yet, there’s an increasing worry that the trade imbalance will increase further.

This is also reflected in the nature of Chinese investments in Indonesia, which have increasingly focused on the archipelago’s energy sector, according to McKinsey. Growth in this sector also requires Indonesia to import more machinery and equipment from China. This is one of the areas where the imbalance keeps getting bigger, as the number of employees in Indonesia’s energy space is outmatched by the number of jobs generated in China’s manufacturing sector.

Jusuf Winandi courtesy of APEC 2013

Indonesia wants China to invest more in local infrastructure

Under the new leadership of President Jokowi, Indonesia is looking to increase its annual economic growth to 7 percent. To achieve that, the nation requires about US$740 billion worth of investments by 2020 for infrastructure projects. Jokowi isn’t shy about his message.

“We are waiting for you to invest in Indonesia,” said Jokowi in front of country leaders at the APEC CEO Summit 2014 in Beijing late last year. The day before, he held a meeting with the Chinese president, inviting China to take “more concrete” forms of action regarding strategic partnerships with Indonesia.

China—the country with the largest foreign-exchange reserves in the world, with as much as US$2.4 trillion—does have access to the funds that Indonesia needs. On January 27, the two nations pledged further cooperation in areas such as trade, investment, and infrastructure. As per the agreement, China will help Indonesia build factories and production lines in various sectors. This, in turn, can also help promote Indonesia’s manufacturing space to the world.

In the past five years, China’s investments in Indonesia have not been deemed as significant as its trading activities. Although China had planned to invest US$18.4 billion in Indonesia in the last five years, only US$1.6 billion (or about 8 percent) of it has actually materialised, creating a mere 40,700 jobs in the nation. China stands in 13th position when it comes to the total direct investment made in Indonesia in the last half-decade. In contrast, Singapore, which stands in the first position, has invested around US$26 billion into Indonesia since 2010.

Jusuf Wanandi, vice chair of the board of trustees at the Centre for Strategic and International Studies (CSIS) Foundation, believes distrust hampers business between Indonesia and China. “We have such a historical burden to carry in our relationship. […] To be frank, it’s because they don’t trust us yet,” Wanandi said in a discussion on Indonesia-China relations last month.

Indosat M2 on Huawei by Ikhlasul Amal(CC)

China’s tech giants are hovering over Jakarta

Indonesia is a very promising tech market. The country is projected to have more than 100 million smartphone users by 2018, a huge increase from its 38.3 million users today. There are about 72.7 million active internet users in the nation, and that still only accounts for less than 30 percent internet penetration.

Not wanting to let this opportunity slip, a number of Chinese tech companies have expanded their reach to Indonesia. In February 2013, China’s tech and media investment behemoth Tencent announced a joint venture with one of Indonesia’s largest media conglomerates, MNC, to push messaging app WeChat’s domestic growth. Shortly after, Chinese web browser Baidu came to Indonesia with a suite of mobile and web apps. Alibaba’s payment gateway Alipay, international marketplace AliExpress, and mobile browser UC Web have also made strong and decisive moves into Indonesia.

Huawei, Oppo, and Xiaomi are just a few Chinese hardware players hoping to capitalise on Indonesia’s growing and affluent middle-class tech consumers. Huawei is playing a big part in Indonesia’s telecoms infrastructure sector, where it is now employing thousands of local workers. Oppo claims to have employed more than 3,000 Indonesians and is planning to set up a smartphone factory in Tangerang city this year. Fellow Chinese comrades like consumer electronics firm Haier and telecommunications equipment company ZTE reportedly is also planning to open smartphone factories in Indonesia.

China will continue to be a very important partner for Indonesia’s economic development in the decades to come. The larger nation seems to have the upper hand when it comes to partnerships, and Indonesia’s focus should lie in balancing the trade deficit.

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