From Asia Times http://www.atimes.com/atimes/Southeast_Asia/HK30Ae01.html

Beijing, Jakarta put business before history
By Bill Guerin

JAKARTA - China's growing appetite for natural resources and Indonesia's position as Asia's resource-richest country are pulling the longtime regional adversaries together in a mutually beneficial commercial embrace.

Indonesian President Susilo Bambang Yudhoyono, who has made several state visits to China since taking power in 2004, has prioritized building up better bilateral relations with Beijing. The two countries last year signed a strategic partnership in Beijing



during Yudhoyono's four-day state visit to the Middle Kingdom, placing Indonesia in the ranks of only a few major countries to be afforded that cooperative status.

Those diplomatic niceties have paved the way for more bilateral trade and investment deals. Two-way trade is expected to reach US$16.7 billion this year, and China is now Indonesia's fourth-largest trading partner after the United States, Europe and Japan. Both countries' trade representatives talk about nearly doubling trade volumes to $30 billion by 2010.

For the first time, Indonesia this year became the biggest global supplier of non-oil-and-gas products to China, according to Indonesia's Central Bureau of Statistics. China ranked as the fourth-largest importer of Indonesia's non-oil-and-gas products, valued at $3.4 billion over the first nine months of this year.

And there is plenty of room for growth. Indonesia has an estimated 177 trillion cubic feet (5 trillion cubic meters) of proven and potential natural-gas reserves. According to industry estimates, China currently burns through 1.52 trillion cubic meters of natural gas per year, and its domestic reserves are expected to run dry by 2020. China has only 2.1% of the world's known crude-oil reserves, and currently imports more than 40% of its fast-growing petroleum needs.

The two countries recently established the China-Indonesia Energy Forum, which now facilitates hundreds of millions of US dollars' worth of Chinese investments in oil, mining, energy and infrastructure projects in Indonesia. According to the state news agency Antara, these include power plants, telecommunications, railways, toll roads, and improvements to existing trade and transport facilities, including the airport and seaport in Papua, Indonesia's easternmost, resource-rich province.

China, which has accumulated more than $1 trillion in foreign reserves and has recently commenced providing financial aid to its poorer Southeast Asian neighbors, has agreed to provide $800 million in soft loans to Indonesia for investment projects. Meanwhile, Chinese companies are increasingly staking out Indonesia-based investments and buying into primary-commodity producers of palm oil, pulp and paper, as well as stakes in oil and gas concerns.

Recently inked projects include $8 billion worth of mining and energy deals in West Java, South Sumatra and South Sulawesi. This includes a planned $2.24 billion 55-45% joint-venture deal between China's Huadian Power International Corp and Indonesian coal miner PT Bukit Asam Batubara to build a 3,240-megawatt power plant in southern Sumatra's Jambi province. The deal, which will be financed chiefly by the Bank of China, was announced after Indonesian Vice President Jusuf Kalla led a high-level business delegation to China.

Yet the growing economic ties cut both ways. China and Indonesia frequently compete for the same global market segments. China's recent rise is widely believed to have come directly at Indonesia's expense, as global manufacturers opted out of Southeast Asian countries for China's cheaper labor and larger unified market.

The two countries are now fierce competitors in the electronics, furniture, and textiles and clothing export industries, and China's lower costs are driving many Indonesian consumer-goods manufacturers into bankruptcy. Indonesia's domestic markets are swamped with cheap Chinese imports, many of which are allegedly smuggled in without paying customs duties or value-added taxes.

There are concurrent concerns about the unregulated flow of natural resources to China. The two countries agreed in 2003 to cooperate in combating the massive trade in illegal timber flowing from Indonesia to China's huge wood-processing industry. A damning report last year by the Environmental Investigation Agency found that some 300,000 cubic meters of illegal merbau (durable, termite-resistant wood of the ipil tree) logs are shipped every month from Indonesia to China.

Although the report pointed the finger at underground smuggling syndicates rather than corrupt government officials, it concluded that the only way to put an end to the illicit trade was through strong concerted efforts by both governments.

Prickly past
The growing commercial ties mark a significant turn for the two countries, whose bilateral relations have long been characterized by mistrust, suspicion and resentment.

The two countries broke off official relations in 1967 and remained at diplomatic odds for more than 23 years after Indonesian strongman Suharto unleashed an anti-communist purge that drove thousands of ethnic Chinese suspected of supporting the Indonesian Communist Party (PKI) out of the country. During the violence, angry protesters destroyed the Chinese Embassy in Jakarta.

Suharto later implemented a set of discriminatory measures known as the "Basic Policy for the Solution of the Chinese Problem"; thereafter China vocally reasserted its historic claims to the Natuna gas fields in Indonesia's territorial waters by invoking an obscure ancient map. Indonesia and China today still have competing territorial claims, along with various other regional countries, to the Spratly Islands.

Ethnic-Chinese business interests now control vast swaths of the Indonesian economy, which historically has often sparked violent resentment across the archipelago. After the 1997-98 Asian financial crisis, Indonesian rioters ransacked and burned down ethnic-Chinese-owned businesses in Jakarta, and the Indonesian government's tepid response to the violence and looting was viewed with resentment in Beijing. Thereafter, some big ethnic-Chinese Indonesian tycoons shipped their money to Singapore and until recently were reluctant to return it.

At least for now, that bitter history is being subordinated to economic interests. Significantly, Beijing has recently playing a behind-the-scenes role in persuading certain top Chinese-Indonesian businessmen who fled with their capital to Singapore in 1998 to bury that past and return to Indonesia. During a meeting last year in Beijing, Vice President Kalla met with several estranged ethnic-Chinese businessmen, who agreed with Chinese officials present to repatriate $1 billion of their capital back to Indonesia, according to news reports.

China clearly hopes that its economic and diplomatic charm offensive toward Indonesia will eventually pay strategic dividends. Currently, 80% of China's oil passes through the narrow and congested Malacca Strait, which straddles peninsular Malaysia and the Indonesian island of Sumatra. China's leaders have openly expressed their concerns that in a potential future conflict with the United States, that country's navy would attempt to choke off China's fuel supplies at the Malacca Strait.

Both China and the US are quietly competing for Indonesia's strategic attentions. That explains why US President George W Bush paid a highly unpopular visit to Indonesia during his pass through the region last week, and why the US last November lifted its six-year arms embargo against the Indonesian military, imposed over concerns about its spotty human-rights record.

Most analysts believe China still has a long way to go before its bilateral relations with Jakarta are on par with the US and Japan. On the Indonesian street, resentment against ethnic-Chinese economic dominance still far outweighs mistrust of the West's intentions. As more mainland Chinese investments enter the country and many become involved in politically sensitive extractive industries, nationalistic politicians represented in parliament could eventually find ethnic cause to complicate the expanding economic relationship.

Yet with Indonesian unemployment hovering around 10%, and with nearly 40 million people living below the poverty level of 60 cents per day, China's big-bang investments are helping to spark economic growth and create badly needed jobs. At least for now, Yudhoyono's pragmatic government is willing to look beyond history and ethnicity in the broader interest of business and economics.

Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has been in Indonesia for over 20 years, mostly in journalism and editorial positions. He specializes in Indonesian political, business and economic analysis, and currently hosts a weekly television political talk show, Face to Face, broadcast on two Indonesia-based satellite channels. He can be reached at softsell@prima.net.id.
_________________________
Jawawa.net: Indonesian Business and Investment News Aggregator