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Economy

China overtakes Japan in Indonesia direct investment

Chinese money flowing into the country grew fivefold from a year ago

JAKARTA -- China overtook Japan as the second largest foreign direct investor in Indonesia in the fourth quarter of 2016, highlighting its growing clout in Southeast Asia's largest economy.

But signs of instability in domestic politics, regulatory changes and a stronger U.S. dollar are set to test China's appetite in 2017.

Realized investments from China was $1.075 billion for the October-December quarter, nearly five times the figure a year earlier, Indonesia's Investment Coordinating Board (BKPM) said on Wednesday. Japan slipped to third place at $902.7 million despite more than doubling investments from a year earlier.

For the full year, Japan's $5.40 billion investment handily beat China's $2.67 billion. Singapore, which remained Indonesia's largest direct investor, is also considered a financial hub for Japanese and other foreign companies investing in Indonesia.

BKPM chief Thomas Lembong says China's rapid pace of growth means it is only a matter of time before it takes over.

"Investment from China has been increasing quite dramatically," Lembong told reporters. "For our country, Singapore and Japan are still larger...but the trend is clear."

He added that the majority of the investment from Hong Kong (in 4th place), which also more than doubled to $2.25 billion for the full year, was likely made through local entities of companies operating on mainland China.

Chinese investors were particularly active in the smelter and power plant sectors, said another senior BKPM official.

But whether the trend will continue in 2017 remains to be seen. The indictment of Jakarta governor Basuki Tjahaja Purnama, an ethnic-Chinese, over charges that he allegedly insulted the Quran has raised racial tensions ahead of the governor election in mid-February. Lembong, who formerly worked in private equity, cited the "short-term challenging political situation" as a major risk factor for investors this year.

The rising tension has been illustrated by large-scale demonstrations against Purnama and widespread social media posts exaggerating China's influence. Indonesian government officials denounced reports late last year that there were 10 million Chinese workers in the country, far more than official figures of 21,000, but has been stepping up scrutiny of the legal status of foreign workers.

Liky Sutikno, chairman of the Indonesian Chamber of Commerce in China, recently told  a forum in Jakarta that Chinese financiers "now see Indonesia as risky."

Rifts are also starting to appear in the mining industry, which observers say has seen a robust inflow of investment from China, the world's biggest consumer of most commodities. Some companies investing in smelters, or facilities that process raw minerals, "cannot install the machines that have been brought home [from China] because they cannot bring in the workers," said Jonatan Handojo, deputy chairman of the Indonesian Smelter Association.

Recently issued mining regulations that eased a ban on nickel ore exports in place since 2014 are further complicating the situation. The decision has put pressure on international nickel prices, unnerving players in the industry.

The turmoil in global financial markets is also a major risk. Emerging market currencies have been under pressure from the rise in the dollar since Donald Trump's victory in the November U.S. presidential elections. While Lembong said local exporters and the tourism sector would benefit from a weaker rupiah, manufacturers in countries that have also seen their currencies weaken, including China, may shift to exports from their home country rather than increase output in Indonesia.

The 140 km Jakarta-Bandung railway project will be a litmus test of whether Chinese and Indonesian governments will seek to further boost economic ties. The $4.3 billion project became a symbol of China's influence in the country, but has seen little progress since kicking off construction a year ago. A spokesperson for Wijaya Karya, an Indonesian construction company which is a member of the consortium developing the project, said last December that the progress is "still small."

BKPM is aiming to boost total investment by another tenth this year, to 678.8 trillion rupiah ($50.9 billion). The tricky issue of courting Chinese investment may be the determining factor in meeting its target.

Nikkei staff writer Bobby Nugroho in Jakarta contributed to this story.

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