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.