Indonesia-China deals

The string of economic, education and research cooperation projects and loan agreements signed in the presence of President Susilo Bambang Yudhoyono and President Hu Jintao in Beijing on Thursday reflect the high confidence these two countries have in the future outlook of their relations.

Several billion dollars worth of China-Indonesia joint ventures in the development of oil refineries, highways, power plants and coal transportation projects are also in the pipeline.

All this is the result of the strong commitment of both Presidents Susilo and Jintao to translate the Strategic Partnership Agreement they signed in Jakarta earlier in April into concrete, feasible cooperation projects for mutual benefit.

The partnership agreement, which serves as an overarching political umbrella for cooperation, has maintained the momentum of the positive developments, especially in terms of bilateral economic ties, which have been thriving since the reopening of diplomatic ties in the early 1990s.

Both leaders fully realize that even though their countries often compete fiercely with each other over a number of industrial exports, their economies actually complement each other in many areas -- China's insatiable appetite for raw materials and Indonesia's abundance of natural resources.

Indonesia badly needs foreign technology and capital to develop its natural resources, while China, with more than US$710 billion in foreign exchange reserves, has been shopping around the world to secure stable sources of raw materials.

Indonesia can benefit from the booming $1.6 trillion Chinese economy and China in turn can secure the supplies of various raw materials by investing directly in natural-resource based projects in Indonesia.

The robust pace of China's economic growth over the past two decades has indeed made its manufacturing sector sizzle with an insatiable demand for raw materials.

For example, China's oil demand has been increasing by more than 25 percent a year, making it the world's second largest oil importer after the United States. This has forced China to secure a stable source of oil supplies by acquiring concessions from around the world, including Indonesia.

China National Offshore Oil Corp. (CNOOC) and China National Petroleum Corp. have been investing tens of billions of dollars in acquiring interests in upstream oil entities in dozens of countries, including Indonesia. China also has signed a long- term contract to import 2.6 million metric tons of liquefied natural gas annually from the Tangguh gas field in Papua, starting within three to four years.

Indonesia has abundant coal resources, which China badly needs to fire its power stations and manufacturing industries. Some analysts estimate that China today uses almost 35 percent of the coal in the world.

Given these mutual benefits, the objective of expanding the two-way trade to $30 billion in 2010 from $13 billion last year is not too tall an order in view of the robust increase in Chinese investment in Indonesia because trade and investment is closely interlinked.

It is the right policy on the part of the government to direct Chinese investments to specific sectors such as energy and basic infrastructure in view of Indonesia's large amount of petroleum imports and inadequate infrastructure, which have eroded the country's economic competitiveness.

This investment targeting policy will also be effective in enhancing development with equity to correct the disparities of development between provinces or regencies and wide gap of income between groups of people caused by the growth-led development policies of the past.

However, the big business deals with China should not lull the government into complacency when it comes to doing its homework, as it still needs further improvements to the overall investment climate.

The first group of Chinese investors, who have entered Indonesia consists mostly of state companies. But this capital inflow will not be sustainable without the support of private investors from China.

The problem though is that most foreign investors remain waiting on the sidelines, expecting significant improvements in the business climate. Investors are willing to stake out their capital only when the general business climate already meets the minimum degree of physical, legal and institutional infrastructure.