The Direction of China's Economic Politics in Indonesia: Between Investment and Instruments
In the last decade, Indonesia-China relations have transformed from mere trade relations into the most decisive economic-political partnership for Indonesia’s future. It is undeniable that China is today the largest trading partner, the second-largest investor, and the main contractor for national strategic projects. However, to understand China in Indonesia, we cannot merely look at investment figures. We must understand the grand logic of China’s political economy.
The current direction of China’s economic politics in Indonesia cannot be separated from Beijing’s grand strategy known as the Belt and Road Initiative (BRI) and the ‘Two Circulation’ doctrine. For Beijing, Indonesia is the most important node in Southeast Asia for three reasons: as a source of critical raw materials for China’s energy transition, as a market for China’s industrial overcapacity, and as a geopolitical buffer to secure the maritime routes of the Malacca Strait.
China’s government policy towards Indonesia is implemented through three interconnected channels.
First, State Economic Diplomacy. Beijing uses Government-to-Government (G2G) schemes to bind flagship projects such as the Jakarta-Bandung High-Speed Railway, nickel smelters in Morowali and Weda Bay, and industrial zones in North Kalimantan. The pattern is always the same: loans from Chinese state-owned banks such as the China Development Bank and Exim Bank of China, with the condition that work is carried out by Chinese contractors. This is not merely business; it is diplomacy that creates long-term dependency, which some scholars call the ‘weaponisation of interdependence’.
Second, the Instrumentalisation of Giant Corporations. This is where the role of giant Chinese companies becomes key. Companies such as Tsingshan, CATL, BYD, Huawei, and China Communications Construction Company (CCCC) are not merely private entities seeking profit. In China’s political economic system, large corporations are an extension of the state. They execute what is referred to in International Relations literature as state capitalism.
When Tsingshan builds a nickel smelter ecosystem from upstream to downstream in Indonesia, it is fulfilling a state mandate to ensure the global electric vehicle battery supply chain remains controlled by China. When Huawei builds 5G networks and national data centres, it executes the Digital Silk Road mandate to ensure technology standards and data flows in Indonesia are compatible with Beijing’s ecosystem. When BYD and Wuling flood the electric vehicle market with very cheap prices, they are executing a strategy to neutralise the Japanese and national automotive industries before we have the chance to build our own.
Third, the Politics of Raw Material Control. The Indonesian government’s ban on raw nickel ore exports was actually an appropriate nationalist policy. However, China responded very quickly: not by resisting, but by moving deeper. By building smelters domestically, China has successfully turned our nationalist policy into an advantage for them. We have succeeded in stopping the export of soil, but we have not yet succeeded in mastering the technology. Value-add is indeed created in Indonesia, but the strategic value continues to flow to China.
So, what must Indonesia do to ensure this relationship is mutually beneficial without compromising sovereignty? For the government, there are four corrective steps that must be bravely taken:
From Mere Downstreaming to Technology Nationalisation. We must stop being satisfied with the construction of smelters. The state must enforce clauses for genuine technology transfer and measurable joint research in every investment contract. It is not enough to just train operators; we must demand the transfer of design, patents, and the capability to build our own smelters without Tsingshan.
Re-audit the Debt Structure and G2G Contracts. The government must transparently recalculate the economic and political costs of G2G projects. The High-Speed Railway project should serve as a final lesson that business-to-business schemes that are ultimately guaranteed by the state are debt traps that harm our State-Owned Enterprises (SOEs). All strategic contracts must be opened to the public and audited by independent national forces.
Building a Diversification Axis. Do not put all your eggs in the Chinese basket. Indonesia must actively attract balancing investment from the United States, Japan, South Korea, the European Union, and the Middle East in the same sectors, particularly in batteries and electric vehicles. Competition between investors will provide us with higher bargaining power.
Enforcing Data and Environmental Sovereignty. For digital investments like Huawei and for nickel smelters, the state must implement strict data sovereignty standards and non-negotiable environmental standards. Sovereignty in the 21st century is not just about territorial boundaries, but about who controls the people’s data and who destroys our environment.
For the Indonesian people, the key is critical awareness. The people should not be anti-China racially, but must be critical of capital. We must support national products, strengthen trade unions in Chinese industrial zones to ensure fair wages and that skill transfers truly occur, and empower NGOs and universities to continue serving as independent overseers of the social and environmental impacts of these investments.
Ultimately, China needs Indonesia as much as Indonesia needs China. China needs our nickel for its global electric vehicle ambitions, and China needs our market of 280 million people. Our bargaining position is very strong if we are united and possess a vision.