China’s struggling economy offers opportunities, and risks, for Indonesia
Rosan Roeslani says the end of the commodity boom should spur Jakarta to implement reforms and boost infrastructure to lure manufacturing away from China and increase tourism revenue
China has transformed into a global superpower. What happens in China now impacts Indonesia, often in multiple ways. Consequently, the growing problems of China’s economy are a concern for Jakarta. But, we should also look beyond the downside risks and identify the opportunities which Indonesia can and should seize.
China’s economy has been struggling in recent months. The latest data shows that, despite increasingly aggressive stimulus measures, the economy continues to slow. In particular, growth in fixed asset investment, once a major driver, has plunged. Exports have been weak and prices are falling, raising concerns about persistent deflation of the sort Japan has endured for two decades.
In addition, the International Monetary Fund has raised an alarm over China’s ballooning debt, which has risen to a worrying 273 per cent of GDP, from 148 per cent of GDP at the end of 2007. Some analysts fear that such a huge expansion of debt in such a short period can only lead to a crisis.
However, the Chinese authorities still have considerable fiscal and monetary firepower which they are using proactively to keep the economy on a stable track. They also have tremendous control over the financial sector, corporate sector and capital flows. That means less risk of an outright crisis as some observers have noisily asserted. Still, China probably cannot avoid a prolonged period of stresses for the next year or two.
While there has been much focus on the near-term risks in China, we also need to understand the long-term impact of China. Even as they address the current threats, China’s leaders have also made bold policy changes to rebalance the economy towards a more sustainable domestic-demand-led model. China is moving up the value chain, vacating labour-intensive activities swiftly, well aware that its labour force is already beginning to decline as a consequence of its ageing population. Moreover, China has been building its own supply chains that rely less on Southeast Asian factories churning out intermediate components, as in the past.
It is also becoming a substantial foreign investor. And its leaders have launched initiatives such as the
“One Belt, One Road” scheme that will help build transport and other connectivity around the world. The financial institutions it has set up – the New Development Bank and the Asian Infrastructure Investment Bank – will become new and large sources of development finance. Over the next two or three years, the toxic mix of China’s economic lassitude, high debt and declining corporate profitability increases the risks of financial shocks, which Indonesia needs to be alert to, as they are bound to hurt its financial markets, currency and economy. In the most likely scenario, the financial pressures on Indonesia are likely to grow. Global investors use China as a proxy for emerging risks, so much so that any added uncertainty over China tends to trigger massive and abrupt capital outflows from emerging economies – including Indonesia. Investors are highly sensitive to what the yuan is doing.
There will also be a broader economic impact, mainly through the effect China will have on export demand and commodity prices: a further slowdown in China would not only affect global demand for Indonesian exports but would also cause commodity prices to decline, hurting Indonesian producers of coal, nickel, copper and rubber. Another channel of impact is through tourism: with rising incomes, more and more Chinese are travelling outside China, making it a major driver of global tourism.
At one level, Indonesia needs to protect itself against these short-term downsides. It needs to keep fiscal and monetary firepower ready in case economic growth is dragged down by developments in China. At the same time, policymakers should contain the financial risks by monitoring the strength of balance sheets in banks and corporations: experience has shown that financial weaknesses often compound an external shock.
On the more positive side, Indonesia should also prepare itself to better exploit the longer-term trends in China. In contrast to China, Indonesia has a youthful and plentiful labour force which will appeal to foreign investors keen to move production out of China where labour is increasingly difficult to find and getting progressively costlier. Improvements in the business environment and infrastructure will help boost relocation of manufacturing activity to Indonesia.
In addition, Indonesia should not worry too much about low commodity prices caused by weaker Chinese demand. Surging commodity prices rarely last and often end in a bust: no economy can truly develop just on the back of high commodity prices. The ending of the commodity boom should be seen as an opportunity: without such easy gains, Indonesia will now work harder at the things that really matter for true economic transformation – doing the heavy lifting of breaking the constraints on infrastructure, reforming outdated regulations, making it easier for companies to go about doing business and relentlessly searching for new engines of growth.
In short, China will pose significant risks in the near term but offer considerable upside in the longer term. Indonesia needs to do what it can to protect itself against these risks. At the same time, since it is not preordained that Indonesia will benefit from the longer-term potential, it needs to address its own weaknesses such as in infrastructure so as to ensure it can truly be a winner from China’s continuing march to a developed nation.
Rosan Roeslani is chairman of the Indonesian Chamber of Commerce and Industry