RI wary of China's slowdown

Dadan Wijaksana, Jakarta

With China set to apply a more conservative policy to prevent its economy from overheating, the government warned on Friday about the adverse effects this could have on Indonesia's economy, particularly on exports.

Minister of Finance Boediono said that, while no calculations had been made so far, China's move would most likely negatively affect the country's exports, at least in the short term.

"We should be prepared should there be a decline in exports to China in times to come," Boediono said, without elaborating on the possible alternatives should his prediction come true.

He did not say which industrial sectors would likely be hit by the policy. Traditionally, Indonesia's exports mainly consist of natural resource-based products such as crude palm oil (CPO), pulp and paper, rubber, and oil and gas.

According to the Central Statistics Agency (BPS), Indonesia's exports to China last year reached US$5.75 billion, as compared to the $4.48 billion worth of products that Indonesia imported from China in the same period.

China is Indonesia's fourth largest export market after the United States, European Union and Japan.

The government has targeted the nation's non-oil and gas exports to increase by 7 percent this year with growth expected to occur mostly in the export of natural resources, such as timber, coffee, cacao, rubber, CPO, and textile and textile products.

It is feared that China's high-flying economy, which has mainly been driven by a massive influx of foreign investment, is in danger of overheating, with a consequent risk of a hard landing given its previous spectacular growth.

The economy has grown by more than 9 percent for the past several years, booking 9.9 percent in the first quarter of this year alone, and far outclasses its peers in the region.

With a bubble effect looming large on the horizon, China's government is considering applying a more conservative approach to its economic policy, with the aim being to gradually slow down the pace of economic growth.

"They intend to slow down growth by reducing the flow of funds, including loans, which will mean a rise in interest rates, which will then slow down the economy," Boediono said.

Analysts, however, have said that the adverse consequences of the move, if any, would only be short term as China's move would actually be beneficial in the long term for Indonesia and many countries in the world currently depending upon China.

Fauzi Ichsan, a global economist at StanChart Bank, said the move by China, which has become one of the world's largest economies, would make the nation's economic growth more sustainable -- which in the long run would benefit the rest of the world.

It would be more dangerous for the world economy if China's economy continued to grow at its current heady rate.

"So in a way, I consider China's move to restrict its growth -- by design, not by default -- to be a wise decision," said Fauzi.