China raises stakes in Indonesia

China’s footprint in Indonesia continues to grow. The two countries have obvious mutual interests: Indonesia has natural resources that China desperately needs, and it has an urgent requirement for investment in those resources and infrastructure, which China can provide.

Although the headline news last week was in a different sector, it was no less notable. It demonstrated the seriousness of Chinese commitment to the sprawling archipelago.

On August 12, the Industrial and Commercial Bank of China (ICBC) agreed to lend Bakrie Telecom the renmninbi equivalent of $300 million, to help the Indonesian telecom operator finance future capital spending. It was the first time a Chinese bank has extended a renminbi loan to a foreign telecommunications company.

ICBC’s facility comes after the Chinese central bank approved such renminbi-denominated transactions in June. Local media reported that the loan carries a 4.6% interest rate.

The deal follows further indications that China intends to increase its investment in Indonesia, as it seeks new sources for commodities, energy and minerals.

Indonesia’s State Enterprises Minister Mustafa Abubakar said on August 2 that China Investment Corporation (CIC), the country’s $300 billion sovereign wealth fund, had expressed interest in investing in three of Indonesia’s state firms — coal miner Tambang Batubara Bukit Asam, electricity utility Perusahaan Listrik Negara (PLN) and port operator Pelabuhan Indonesia II.

Initial investment is likely to be $2 billion next year, but that figure could increase more than twelve-fold to $25 billion, say sources. CIC invested $58 billion overseas last year, according to its annual report.

Of course, these will not be the first high-profile CIC investments in South East Asia’s biggest economy. In September 2009, it lent $1.9 billion to Bakrie-controlled Bumi Resources, Indonesia’s largest coal miner.

The country’s transportation infrastructure might also get well-needed improvements. Earlier this year, Coordinating Minister for the Economy Hatta Rajasa said that Chinese investment in Indonesia will be prioritised on infrastructure and transportation. His statement followed a meeting on April 3 between President Susilo Bambang Yudhoyono and  Chinese Trade Minister Chen Deming.

In addition, the two countries agreed to maximise the allocation of $1.8 billion of preferential export credits to help finance several projects, including a power plant in Parit Baru, West Kalimantan province, and a toll road in North Sumatra. And it was revealed that Aneka Tambang, Indonesia’s second-biggest metal company by market value, intends to partner with a Chinese firm to build a $1.2 billion alumina smelter.

Natural gas is another potential target for Chinese investment. There are several LNG projects in Indonesia that require financing – notably the Natuna project in Java, where China National Petroleum Corporation has been named as a possible partner for Pertamina, the Indonesian state-owned energy company.

The China-Asean Free Trade Agreement (FTA) was established at the start of 2010, and it should lead to further bilateral trade between China and Indonesia, which has grown steadily for the past 10 years, and significantly during the last two years.

Investment by Chinese enterprises in Indonesia increased by nearly 30% in 2009 to $220 million, according to Indonesia’s trade ministry, and bilateral trade between the countries amounted to $25.5 billion, compared with just $12.5 billion in 2005.

However, protectionist pressures and historical tensions might erect hurdles for stronger cooperation.

Also in April, the Indonesian Chamber of Commerce and Industry (Kadin) criticised the government for not doing enough to protect domestic companies  from the influx of cheap Chinese products as a result of the full implementation of the FTA. In particular, it wanted to retain tariff charges on some imports.

Ethnic Chinese dominate the Indonesian economy, but were politically marginalised by President Suharto’s regime between 1965 and 1998. In May 1998, during the worst of the economic crisis, rioters in Jakarta, Medan and other cities targeted Chinese and their businesses, and residual suspicions of their economic power remain, despite the dismantling of Suharto’s racist policies.

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