Part 1 of 2

Part 1 of 2

RI-PRC economic ties: A view from Shanghai

Mari Pangestu, Economist, Shanghai, China

It is timely to evaluate the relationship between our two
economies in light of the important visit by Premier Zhu Rongji
to Indonesia, especially with the bird eye's view of living in
Shanghai and after just witnessing the spectacular events of the
meeting of the Asia Pacific Economic Forum which China hosted.

China has heralded its official entry into the global economy
with a display of statesmanship as well as the most incredible
fireworks display seen in most recent times.

Awareness of China's economic dynamism and size has of course
not gone unnoticed and we are often regaled by some of the
fantastic indicators. China has continued to grow at 7-8 percent
even during the financial crisis and last year its growth rate
was 8 percent. This year they are projected to experience the
highest growth rate in the region at 7.3 percent and the target
growth rate doe 2001-2005 of 7 percent is deemed to be
achievable.

Despite the fact that export growth will be less than one
third of last year's growth at 10 percent compared with 38
percent. The main reason is that domestic demand continues to be
robust, and monetary and fiscal policies targeted at ensuring
this remains the case. We also hear of how China has sucked in
US$45 billion of foreign direct investment last year, accounting
for 70 percent of the share of East Asia, and how there has been
heightened investor interests as China finally prepares to accede
the WTO after 14 years of negotiations.

The share of China in world trade will also double from 5 to
10 percent in the next few years. In the last few years China has
also achieved a great deal of progress in reforms, much of it
under the vision and persistence of Premier Zhu Rongji.

Nevertheless, China has remained both alluring and preplexing
for many would be investors or investors already operating in
China. There is certainly a lot of hype and huge potential market
size, but talk to anyone who has done business in China and there
will be also many cautionary tales. The difficulties include the
failure to recognize that China is not one unified market of 1.2
billion people due to regional restrictions, geography and
localized differences in taste.

It also includes the familiar reasons such as lack of legal
framework and certainty of policy and regulations, lack of
corporate governance and transparency, and continued predominance
of the state. The prospects for China's growth and real opening
up of its markets under WTO accession, have also been couched
with caution about the speed and faithfulness of implementation
of the agreements and the complex challenges of reforming the
state owned sector, as well as managing the social and regional
inequities which are massive.

Seventy five percent of the population are still rural and
growth has been uneven; China faces important challenges in
increasing the benefits of development to the poorer areas in the
West and also the dislocations that will come about due to
reforms in the state owned sector and agriculture. If this is not
managed successfully, then of course there can be greater
uncertainties in the whole process.

The bottom line is that one must take a realistic view of
China, but whatever the outcome, China is already and will become
an economic powerhouse in the region and just by its sheer size,
whatever happens there will be an impact on the rest of the
region. We in Indonesia and ASEAN do need to understand China
better, and strengthen and improve cooperation and links. This
certainly has been the sentiment emerging from the recent ASEAN
Summit.

The downturn in the world economy and the trend toward
regionalism, has certainly made engaging with China more
proactively and productively a priority. However it is far from
clear what will be needed to turn this into reality and mutually
beneficial outcomes.

Lets take a quick assessment of current Indonesia-China
relations and analyze how each aspect can be enhanced and
improved.

Bilateral relations between China and Indonesia have improved
significantly since the normalization of diplomatic ties in
August 1990. Based on Chinese statistics, the value of trade
between China and Indonesia has almost quadrupled from $1.9
billion in 1991 to $7.5 billion in 2000, which amounts to an
average growth rate of 30 percent p.a.. Indonesia currently
accounts for $4.4 billion of Chinese imports or two percent of
its total imports, making it China's 14th largest trading
partner.

The composition of China's imports from Indonesia has become
more diversified, with the share of oil and gas falling from 46
percent of imports in 1992 to around 20 percent now.
Nevertheless, slightly more than half of China's imports from
Indonesia remain natural resource based, namely oil and gas (18
percent), wood (18 percent), wood pulp (12 percent), and paper
and paperboard (5.8 percent). The remaining imports comprise of
some capital goods such as machinery and intermediate goods such
as plastic and chemicals. The only significant manufactured
products are fabric and they make up only around 5 percent of
total imports.

China's exports to Indonesia increased six fold from $0.5
billion to $3 billion (based on Chinese statistics) in the 1991-
2000 period. The main products are electrical machinery (13.2
percent), machinery (13.4 percent), and mineral fuel (13
percent), and vehicles (6 percent). The others are a mix of
inputs and final products including chemicals, yarn and fibers,
iron and steel, cooking oil, plastic and rubber. China is the
fifth largest import supplier to Indonesia.

By the end of 1999, the cumulative number of investment
projects by Indonesians approved to enter into China reached 700
agreements with a planned investment value of $1.5 billion and
realized investments of $688 million. These figures probably
represent an under estimation of Indonesian investment in China
as there are investments which come in via Hong Kong, Taiwan,
Macau or other countries, as well as domestic investments. There
is a continued interest by Indonesians to invest in China,
especially after recognizing the speed of development and change
in China.

Whereas the cumulative amount of Chinese investments approved
in Indonesia as of August 2001, amounted to close to $0.5 billion
based on Board of Investment (BKPM) numbers. After dropping
precipitously in 1998 to only $7.6 million, there was a large
increase of $154 million just in the year 2000 alone.

On the trade and investment front, it is clear that China
represents both a competitive challenge and an opportunity for
Indonesia. Indonesia will have to compete with Chinese goods in
Chinese markets, in the Indonesian market and in third markets
where both countries are exporting. China is a vast country with
a range of comparative advantages ranging from low cost labor
intensive to the higher levels on the value added chain.

Businesses based in Indonesia need to figure out the niche in
which they now have competitive advantage vis a vis China which
can be due to access to natural resources or other country and
firm specific advantages to compete with Chinese products in
China, in Indonesia and in third markets. They can also benefit
by searching for cheaper sources of inputs from China.

There are specific areas of cooperation that could be
strengthened such as the great potential in resource based
sectors where Indonesia has comparative advantage. The rapid
growth experienced by China will mean increased demand for fuel
and other resources it does not have in sufficient quantities in
the foreseeable future. China has been a net oil exporter since
1993 and its two largest fields in Daqing and Shengli are mature
and already experiencing declining production.