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Desperate for investment, Indonesia plays China against Japan

After more than five years of feasibility studies and high-level lobbying, Japanese officials thought they were on the brink of bringing bullet trains to Indonesia. Then China showed up.

[SINGAPORE] After more than five years of feasibility studies and high-level lobbying, Japanese officials thought they were on the brink of bringing bullet trains to Indonesia. Then China showed up.

"Suddenly, the minister of state-owned enterprises announced they had made something with the Chinese," said Hiromichi Muraoka, senior Indonesia representative of the Japan International Cooperation Agency, the country's foreign aid arm. "That surprised me."

Japan versus China. It's a story that is being writ large in the region, where decades of investment by Japan and its companies are now being challenged by China. And nowhere could the shift become more influential than in Indonesia.

Southeast Asia's biggest economy has the largest population and most natural resources in the region. Its vast archipelago stretches from the Indian Ocean to the Pacific and borders some of the world's busiest shipping lanes.

China's desire to develop political and commercial links to the country is a boon for Indonesia's President Joko "Jokowi" Widodo, a former furniture exporter who believes he can leverage competition with Japan to get better deals, according to Wellian Wiranto, an economist at Oversea-Chinese Banking Corp in Singapore.

"Indonesia needs a lot of infrastructure and China has the expertise and the money," Mr Wiranto said. "You add that up with the political factor between Japan and China, and it's quite hopeful that China will be pumping more money into Indonesia."

Mr Jokowi and China's President Xi Jinping also have interests in common. The Indonesian leader wants to develop the country's ports and fishing to create a "global maritime axis," an ambition that complements Mr Xi's plan for a "Maritime Silk Road" in Asia. Indonesia also supports China's suggestion for the Asian Infrastructure Investment Bank, which could end up funding projects Indonesia needs.

With China's wages rising and economic growth slowing, Chinese companies have additional incentives to invest abroad.

Hence the headache for Mr Muraoka. Japanese feasibility studies into high-speed trains in Indonesia date back to at least 2009. The aim is to cut the rail journey between Jakarta and Bandung, the country's third-biggest city, to less than 40 minutes, from three hours.

The project would cost 726.4 billion yen (US$6.1 billion), partly from the Indonesian government, according to a November 2012 feasibility study posted on the website of the Japan External Trade Organization.

As late as March 24, JICA President Akihiko Tanaka urged Jokowi to consider the Japanese proposal when the two met in Tokyo, according to a release from the agency.

Then, on April 23, Indonesia's State-Owned Enterprises Minister Rini Soemarno dropped her bombshell. She said the government was considering a Chinese offer to build the railway as part of a US$50 billion funding commitment from Chinese state banks.

Ms Soemarno told reporters that the Chinese proposal was attractive because it didn't require Indonesia to provide funding guarantees.

"Japan always asks for a guarantee," she said. "As long as they are in partnership with a state-owned enterprise, Chinese companies will never ask for a government guarantee."

Indonesia estimates it needs to spend US$450 billion on roads, railways, ports and power stations to revive an economy that shrank in the past two quarters. The state budget can only cover about 30 per cent of that, according to the investment board.

China still has a long way to go to unseat Japan, Singapore and South Korea as Indonesia's top sources of investment. Those three together spent more than US$3 billion in the first quarter, compared with China's US$75 million, according to investment board data, not including oil and gas and financial services.

That's partly because China is starting from a low base. It only reestablished diplomatic relations with Indonesia in 1990 after a break of 23 years. During that time, former President Suharto carried out a brutal crackdown on communism and repressed the language and culture of the local ethnic Chinese.

Japan has been carrying out economic and development assistance programs in Indonesia since the late 1950s.

Rizal Affandi Lukman, deputy minister for international economic cooperation, said he expects China will jump from its current ranking of 10th-biggest investor to top the list within five years.

"There is so much eagerness for Chinese investors to get into infrastructure projects," Mr Lukman said in an interview.

High-level contact between Indonesia and China suggests Jokowi is happy to court that investment. He has visited China twice since becoming president in October.

When Indonesia hosted the Asian-African summit last month, Mr Xi flew down on the final day to Bandung, location of the group's first meeting 60 years ago. He walked alongside Jokowi to the conference venue, recreating a stroll that their predecessors, Sukarno and Mao Zedong took back in 1955.

Turning China's interest into actual investment has been more elusive. China has a history of not delivering on promised projects, said Tamba Hutapea, deputy director for planning at the investment board, something he put down to a lack of familiarity between the two nations.

"There is a wariness about Chinese investment that is masked by Jokowi and his aides' eager efforts to market Indonesia to Chinese investors," said Aaron L Connelly, a research fellow in the East Asia Program at the Lowy Institute for International Policy in Sydney. "Indonesian policy makers have been frustrated with the quality of Chinese firms' work on projects financed by Chinese investment, particularly in the power sector."

Even with the Chinese as competitors, the scale of Indonesia's infrastructure needs means Japan's investment is unlikely to end. Japanese companies are building a mass rapid transit system in Jakarta, and JICA said it approved loans for seven projects last year worth 62.3 billion yen.

On his trip to Japan in March, Mr Jokowi urged a group of businessmen and officials to invest in Indonesia's infrastructure. He's promised to settle land disputes that have blocked a Japanese-backed power station in Java.

Chinese companies hoping to join them must also navigate the corruption, bureaucracy, cultural differences and changing regulations that have bedeviled foreign investments in the country for decades. China's investments in countries such as Vietnam and Ethiopia have relied on bringing in its own workers for many factory and construction jobs. Chinese companies could find that more difficult in Indonesia, which is clamping down on work visas for foreigners who do jobs that locals could do.

"There are obstacles when going global, but we're looking on the bright side," said Li Huaizhen, president of China Minsheng Investment Corp, which announced on April 20 that it intends to build a US$5 billion industrial park in Indonesia.

"This is a good time to invest in Indonesia," he said. "The two countries are getting very friendly."