Part 1 of 2<\/p>\n
RI-PRC economic ties: A view from Shanghai<\/p>\n
Mari Pangestu, Economist, Shanghai, China<\/p>\n
It is timely to evaluate the relationship between our two
\neconomies in light of the important visit by Premier Zhu Rongji
\nto Indonesia, especially with the bird eye's view of living in
\nShanghai and after just witnessing the spectacular events of the
\nmeeting of the Asia Pacific Economic Forum which China hosted.<\/p>\n
China has heralded its official entry into the global economy
\nwith a display of statesmanship as well as the most incredible
\nfireworks display seen in most recent times.<\/p>\n
Awareness of China's economic dynamism and size has of course
\nnot gone unnoticed and we are often regaled by some of the
\nfantastic indicators. China has continued to grow at 7-8 percent
\neven during the financial crisis and last year its growth rate
\nwas 8 percent. This year they are projected to experience the
\nhighest growth rate in the region at 7.3 percent and the target
\ngrowth rate doe 2001-2005 of 7 percent is deemed to be
\nachievable.<\/p>\n
Despite the fact that export growth will be less than one
\nthird of last year's growth at 10 percent compared with 38
\npercent. The main reason is that domestic demand continues to be
\nrobust, and monetary and fiscal policies targeted at ensuring
\nthis remains the case. We also hear of how China has sucked in
\nUS$45 billion of foreign direct investment last year, accounting
\nfor 70 percent of the share of East Asia, and how there has been
\nheightened investor interests as China finally prepares to accede
\nthe WTO after 14 years of negotiations.<\/p>\n
The share of China in world trade will also double from 5 to
\n10 percent in the next few years. In the last few years China has
\nalso achieved a great deal of progress in reforms, much of it
\nunder the vision and persistence of Premier Zhu Rongji.<\/p>\n
Nevertheless, China has remained both alluring and preplexing
\nfor many would be investors or investors already operating in
\nChina. There is certainly a lot of hype and huge potential market
\nsize, but talk to anyone who has done business in China and there
\nwill be also many cautionary tales. The difficulties include the
\nfailure to recognize that China is not one unified market of 1.2
\nbillion people due to regional restrictions, geography and
\nlocalized differences in taste.<\/p>\n
It also includes the familiar reasons such as lack of legal
\nframework and certainty of policy and regulations, lack of
\ncorporate governance and transparency, and continued predominance
\nof the state. The prospects for China's growth and real opening
\nup of its markets under WTO accession, have also been couched
\nwith caution about the speed and faithfulness of implementation
\nof the agreements and the complex challenges of reforming the
\nstate owned sector, as well as managing the social and regional
\ninequities which are massive.<\/p>\n
Seventy five percent of the population are still rural and
\ngrowth has been uneven; China faces important challenges in
\nincreasing the benefits of development to the poorer areas in the
\nWest and also the dislocations that will come about due to
\nreforms in the state owned sector and agriculture. If this is not
\nmanaged successfully, then of course there can be greater
\nuncertainties in the whole process.<\/p>\n
The bottom line is that one must take a realistic view of
\nChina, but whatever the outcome, China is already and will become
\nan economic powerhouse in the region and just by its sheer size,
\nwhatever happens there will be an impact on the rest of the
\nregion. We in Indonesia and ASEAN do need to understand China
\nbetter, and strengthen and improve cooperation and links. This
\ncertainly has been the sentiment emerging from the recent ASEAN
\nSummit.<\/p>\n
The downturn in the world economy and the trend toward
\nregionalism, has certainly made engaging with China more
\nproactively and productively a priority. However it is far from
\nclear what will be needed to turn this into reality and mutually
\nbeneficial outcomes.<\/p>\n
Lets take a quick assessment of current Indonesia-China
\nrelations and analyze how each aspect can be enhanced and
\nimproved.<\/p>\n
Bilateral relations between China and Indonesia have improved
\nsignificantly since the normalization of diplomatic ties in
\nAugust 1990. Based on Chinese statistics, the value of trade
\nbetween China and Indonesia has almost quadrupled from $1.9
\nbillion in 1991 to $7.5 billion in 2000, which amounts to an
\naverage growth rate of 30 percent p.a.. Indonesia currently
\naccounts for $4.4 billion of Chinese imports or two percent of
\nits total imports, making it China's 14th largest trading
\npartner.<\/p>\n
The composition of China's imports from Indonesia has become
\nmore diversified, with the share of oil and gas falling from 46
\npercent of imports in 1992 to around 20 percent now.
\nNevertheless, slightly more than half of China's imports from
\nIndonesia remain natural resource based, namely oil and gas (18
\npercent), wood (18 percent), wood pulp (12 percent), and paper
\nand paperboard (5.8 percent). The remaining imports comprise of
\nsome capital goods such as machinery and intermediate goods such
\nas plastic and chemicals. The only significant manufactured
\nproducts are fabric and they make up only around 5 percent of
\ntotal imports.<\/p>\n
China's exports to Indonesia increased six fold from $0.5
\nbillion to $3 billion (based on Chinese statistics) in the 1991-
\n2000 period. The main products are electrical machinery (13.2
\npercent), machinery (13.4 percent), and mineral fuel (13
\npercent), and vehicles (6 percent). The others are a mix of
\ninputs and final products including chemicals, yarn and fibers,
\niron and steel, cooking oil, plastic and rubber. China is the
\nfifth largest import supplier to Indonesia.<\/p>\n
By the end of 1999, the cumulative number of investment
\nprojects by Indonesians approved to enter into China reached 700
\nagreements with a planned investment value of $1.5 billion and
\nrealized investments of $688 million. These figures probably
\nrepresent an under estimation of Indonesian investment in China
\nas there are investments which come in via Hong Kong, Taiwan,
\nMacau or other countries, as well as domestic investments. There
\nis a continued interest by Indonesians to invest in China,
\nespecially after recognizing the speed of development and change
\nin China.<\/p>\n
Whereas the cumulative amount of Chinese investments approved
\nin Indonesia as of August 2001, amounted to close to $0.5 billion
\nbased on Board of Investment (BKPM) numbers. After dropping
\nprecipitously in 1998 to only $7.6 million, there was a large
\nincrease of $154 million just in the year 2000 alone.<\/p>\n
On the trade and investment front, it is clear that China
\nrepresents both a competitive challenge and an opportunity for
\nIndonesia. Indonesia will have to compete with Chinese goods in
\nChinese markets, in the Indonesian market and in third markets
\nwhere both countries are exporting. China is a vast country with
\na range of comparative advantages ranging from low cost labor
\nintensive to the higher levels on the value added chain.<\/p>\n
Businesses based in Indonesia need to figure out the niche in
\nwhich they now have competitive advantage vis a vis China which
\ncan be due to access to natural resources or other country and
\nfirm specific advantages to compete with Chinese products in
\nChina, in Indonesia and in third markets. They can also benefit
\nby searching for cheaper sources of inputs from China.<\/p>\n
There are specific areas of cooperation that could be
\nstrengthened such as the great potential in resource based
\nsectors where Indonesia has comparative advantage. The rapid
\ngrowth experienced by China will mean increased demand for fuel
\nand other resources it does not have in sufficient quantities in
\nthe foreseeable future. China has been a net oil exporter since
\n1993 and its two largest fields in Daqing and Shengli are mature
\nand already experiencing declining production.<\/p>",
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