Monday, May 9, 2016

Reading China's diplomatic strategy in Indonesia

DIPLOMATIC TOKEN? Corruption suspect Samadikun Hartono (center) was flanked by State Intelligence Agency chief Sutiyoso (left) and his deputy for foreign affairs Sumiharjo Pakpahan (right) in his arrival in Jakarta following the convict's recent arrest in Shanghai, China. 

Photo courtesy of Wendra Ajistyatama/Jakarta Post  

China has complied to Indonesia's demands to extradite Samadikun Hartono, a corruption fugitive who was alleged to embezzle Rp 169 billion (US$12.8 billion) of state bailout funds disbursed in the aftermath of the 1997-1998 Asian Financial Crisis, just moments after his arrest in Shanghai.

Initially, there were tittle-tattles that Beijing demanded the transfer of four Chinese Uyghurs, who were arrested by police in East Indonesia on terrorism charges, in a prisoner-swap agreement. But, China eventually agreed to send back the Indonesian corruption suspect without getting any tangible in return.

Yet focusing the diplomatic discourse on the prospect of prisoner-swap agreement means one is misunderstanding China's domestic politics and its foreign policy principles.

First, a prisoner-swap deal for the Uyghurs, who allegedly planned to set up terrorism acts in Indonesia, smacks no logic of China's foreign policy ideology. China has long been known as the upholder of "non-interference" foreign policy strategy, as Beijing always tries to back off from meddling in its interlocutors' internal affairs - in this case Indonesia's national security - when carrying out business or diplomatic relations.

This sets China apart from other Western countries, notably the US, which always scrutinizes and reproaches the human rights and political system principles of countries they are dealing with. All over the world, China's foreign aids neither impose specific political conditions nor require specific reprisals in return.

Second, although it is indeed every nation's responsibility to protect its citizens overseas, it is important to learn that bringing home the arrested Chinese Uyghur detainees would bring little political benefits for China domestically. The bitter truth is that the local Chinese Han people, who account for 90 percent of the Mainland's total population, rarely see Uyghur people as one of them, and vice versa.

The Uyghur Muslims, who have distinctive looks, different values and even their own native language, are proud of their own identity of being different with the Chinese Han people. Predictably, separatism or even terrorism movements become problems in their home province of Xinjiang, an autonomous administration in northwest China that is closer to the capitals of Kazakhstan and Afghanistan than to Beijing.

So, when Indonesian Law and Human Rights Minister Yasonna Laoly initially claimed that the extradition of Samadikun from Shanghai could not proceed smoothly as China had "demanded something in return", yet then suddenly Beijing reversed its course, we could cogently guess that the whole turn of events might actually be an astute diplomatic maneuver engineered to appease Jakarta.

Such a maneuver is relevant to be discussed because, in the future, we are likely to see more diplomatic "kindheartedness" from China - wrapped in no-strings-attached assistance or ostensibly generous political moves - as part of the Mainland's concerted and overarching foreign policy strategy to boost its regional soft power, an area that Beijing is lacking at the moment.

Within the international community, China still commands less respect than it actually deserves. China is respected no more but its economic and military might, given the nation's lack of diplomatic prowess and its absenteeism in strategic global issues.

However, while China tends to hold back from intervening in affairs in Middle East or Europe, it cares so much about issues pertaining its national interests, such as Taiwan or South China Sea.

As the South China Sea has seen intensifying tensions recently, surely there isn't any better chess move for China than winning the support from Pacific-Rim nations, and especially Indonesia, the largest economy in Southeast Asia and the de facto leader of ASEAN?

One possibility here is that China, perhaps, is feeling apologetic to Indonesia. From Indonesians' point of view, Beijing's response to the clash between a Chinese coast guard vessel and an Indonesian government sea patrol last month in Natuna waters near Riau Islands might look rude and somewhat ungracious, particularly if one sees it from the Javanese cultural perspective of President Joko Widodo, who so far has attempted to build stronger ties with China.

In that incident, China argued by including part of Natuna waters in its territorial map, according to a report by Indonesian state-run news agency Antara, which quoted Cmdre. Fahru Zaini, an assistant deputy to the chief Indonesian security minister. China's official statement also said that the vessel was in its traditional fishing grounds.

The least things that China should do now is affronting Indonesia, with which it supposedly has no overlapping territorial claims in the South China Sea, and offending Jokowi. Under the President's leadership, Indonesia became the co-founder of the China-led Asian Infrastructure Investment Bank (AIIB). The President has also granted China the rights to develop the archipelago's first high-speed railway connecting Jakarta to Bandung, thus snubbing the seven years lobbying of Japan, who was the first to float the idea.

The US$5.5 billion Jakarta-Bandung railway was particularly crucial as it is slated to be the entry point for Chinese investors to other lucrative infrastructure projects envisioned by Jokowi, such as dams and power plants, where Chinese firms are known to have the technological expertise.

Recently, in east Aceh waters, the Indonesian navy detained a Chinese vessel with 25 Chinese nationals and four Indonesians on board, for allegation of illegal fishing, trade and slavery. How China responds to this issue would be interesting: Beijing surely has learned that it could be counterproductive to deal with Jakarta with a rigid and overly assertive diplomatic approach.

Under President Jokowi, ties between the two nations now are arguably in the strongest level since the leftist leadership of President Sukarno more than 60 years ago. The Chinese might not want to make the bond untidy because strong diplomatic ties with Indonesia is crucial for the Mainland's own diplomatic and economic interests.

This article was published in The Jakarta Post on Monday, May 9 2016

Monday, April 11, 2016

How to Make China-Indonesia Railway Cooperation Work

I WANT IT LIKE THIS. Indonesian President Joko Widodo briefed stakeholders during the groundbreaking ceremony of Indonesia's first high-speed railway project connecting Jakarta and Bandung. China won the tender of the project to the dismay of Japan, who was the first to float the idea and had lobbied the Indonesian government for eight years.

(Photo courtesty of Dita Alangkara/Associated Press)

In infrastructure development, the enigma about China is that it has both the most efficient system in the world but perhaps the least understood one. 

In Indonesia, months of debates and media circus have stalled the construction of the 145-kilometer Jakarta-Bandung railway project, with various policymakers, business stakeholders and representatives from NGOs trading jabs in newswires over the project's feasibility. It was not an appetizing sight for a project that was initially devised as the paragon of China's infrastructure expansion in Asia.

Earlier this year, I reflected our domestic political brouhaha with irony inside a high-speed train from the capital Beijing to Harbin, a major city in northeast China.

The Beijing-Harbin railway spans 1,250 kilometers, a distance that is equivalent of Jakarta-Bali, and I felt somewhat chagrined that Indonesia found it so difficult to construct a railway project that would only be a tenth of its distance.

My Chinese professor had an explanation why infrastructure development in his country could be so ruthlessly effective: "In democratic countries you face more constraints, but here in China you face rule of man, not rule of law."

The multi-billion dollar question now here is whether the economic cooperation between Indonesia and China, which are two countries with strikingly different political systems, can prosper. 

As far as the economic cost is the only concern, the Indonesian government's decision to grant China, not Japan, with the responsibility of building the Jakarta-Bandung bullet train project is justifiable. 

A study from the World Bank office in Beijing shows that the construction of China's high-speed railway - defined as those that can be traveled by trains with maximum speed of 350 kilometers per hour - has a typical infrastructure unit cost of about US$17-21 million per kilometer, excluding land, rolling stock and interest during construction. 

In European countries such as France and Spain, a similar infrastructure is estimated by the World Bank to cost $25-39 million for every kilometer, while in California, the US, the price tag stands at $51 million. 

The efficiency was driven by the fact that, over the past decade, China has built more high-speed railway infrastructure than any other country, with the mainland now boasting a network of more than 12,000 kilometers of high-speed railway routes - the longest in the world.

The notion prevalent among Indonesians that "Made-in-China" products come in cheap prices but questionable quality is purely misconception. In reality, China currently possess the technical know-how in building railway networks with the fastest and cheapest way possible, thanks to their highly standardized railway infrastructure design and a successful localization of manufacturing of its goods and components. 

The predicament faced by Chinese firms, however, is that building railway network in their own turf and in Indonesia might be a totally different ball game. 

To start, Chinese and Indonesian state-owned enterprises (SOEs) have stark difference in perspectives and working culture, which means the cooperation between the two camps is unlikely to be smooth. Unlike in China, where SOEs basically act as the government's developmental tools in a highly centralized economy, Indonesian SOEs are not backed with political support that is as strong as their Chinese counter parts. They instead possess a relatively high degree of independence.

In addition, Chinese firms were accustomed to the authoritarian-style infrastructure building approach, the imposition of which sometimes came at the expense of environmental degradation and violation of human rights, with reports showing there were many Chinese citizens who were forcefully evicted from their homes or lands without receiving sufficient compensation.

If China wants to be successful in its push to strengthen its regional influence, and to eventually emerge as the next global superpower on the same par with the US, it needs to learn better about democracy, particularly how to do business in countries with strict environmental, governance and transparency standards.

And so far, their track record on that is not good.

"Some commodity-rich countries have balked at dealing with Chinese firms, troubled by their weak record of social responsibility, which has forced Beijing to explore new ways of doing business," once wrote Elizabeth C. Economy, a noted author who specializes in China's foreign policy.

Nevertheless, the burden does not lie in Beijing alone. For the central government in Jakarta, the political ruckus surrounding the China-backed railway project has sent the wrong signal for foreign investors, exposing the inefficiency of our bureaucracy and the messiness in the decision-making process for infrastructure development under President Joko Widodo.

For Indonesia to attract more Chinese investors and capitalize on the mainland's outward investment push, the government could improve itself in three fronts. 

First, the government needs to cut bureaucratic hurdles and set investment guidelines very clear for Chinese investors who - unlike their Japanese or American counterparts - have little business history in Indonesia.

Second, Indonesian local leaders - from governors, regents to mayors - should be instructed to undertake more efforts to court the Chinese investors and improve the governance in the local level. This is because in their home country, Chinese businesspersons are accustomed to have strong bond with local leaders, who will always be ready to help them go through the bureaucratic red tapes while acting as the "political guardians" of their investments. 

Third, Indonesian government officials or other local business stakeholders should really avoid making public any disagreement on China-related projects, as that situation can make existing and future Chinese investors very uncomfortable. 

That should be noted because in Indonesia some policymakers have the culture of having "roundtable meeting in newspapers" as they prefer to voice their disgruntlement to journalist to garner public support, instead of solving the issue with the persons in charge directly. China, a country that has very limited press freedom, values the culture of secrecy where dissenting opinions among officials or businesspersons in public are considered taboo.

Indonesia could reap the maximum benefits from the Jakarta-Bandung bullet train project. For Indonesian SOEs in particular, this is the moment to absorb Chinese technological expertise for our future infrastructure development - a strategy that was exactly applied by Chinese SOEs in 2004, when China demanded technology transfer from German companies as a prerequisite for the rights to develop the mainland's high-speed railway networks.

The inconvenient truth here is that an authoritarian China and a democratic Indonesia were not match made in heaven. And just like an in-love couple with strikingly different personalities, the two countries have so much to do to make their relationship work. 

This article was published in The Jakarta Post on Monday, April 11 2016   

Friday, January 15, 2016

Is 'China crisis' disproportionately overblown?

RAINY DAYS AHEAD. Chinese leaders Xi Jinping and Li Keqiang are now bracing a stormy weather as the economy is growing at its slowest pace in more than 25 years, a situation that has incited serious concerns among international observers.
(Photo courtesy of Andy Wong / Associated Press)

China is on top of minds of international media and economic policymakers recently as its equity markets nosedived and its currency fluctuated wildly. The world's second-largest economy is estimated to record only 6.9 percent of gross domestic product (GDP) growth throughout 2015, the slowest annual expansion in more than twenty years, and investors' major fear factor is that China could record another deeper-than-expected slowdown this year. 

Stock indices around the world saw massive sell-offs on fears the collapse of China may take the whole world with it. Market speculator George Soros cautioned that recent China-triggered volatility might mean the 2008 global financial crisis is bound to repeat. 

But, as the world is on edge over possible crash in China, citizens living in the Mainland now might be wondering perplexingly: Where's the crisis? 

Here in Beijing, consumer spending is as strong as ever as people are still flocking into shopping centers. malls and supermarkets remain crowded despite the recent boom of e-commerce businesses, which encouraged more people to turn to internet startups such as Taobao (China's version of Amazon) to buy online their necessities from food, clothes, to detergent.

My friend who is working in a global consumer goods company admitted that her company noticed declining sales throughout China, but noted that it was caused by fiercer competition due to strong growth of local Chinese brands, not by weaker demand. 

Outside the capital, local tourists still passionately flocked into sightseeing spots. The last time I traveled outside the city with a high-speed train, whose tickets are considered generally expensive for the standards of Chinese locals, it was full and there wasn't any single vacant seat as far as my eyes could see.

Unlike in 2008. when the stock and housing market crash in the US rippled to its real sector through rampant layoffs and morgage closures in a zap, optimism among the Chinese people remains intact despite the slowdown and the constant, worrying drop in stock markets in Shanghai and Shenzhen since mid-2015.

Most importantly, the phases of "economic crisis" or "market crash" were never mentioned by my economics professors in Peking University, a campus that is known for a culture of being critical towards the Chinese government. They just showed no gestures of worry at all. 

One of my professors cooly explained that Chinese policymakers might have decelerated growth by purpose, as the too fast economic growth predisposed the country into overheating. This is why, despite the lingering slowdown, China's fiscal and monetary policy stances were still set in a rather "tight" setting, not expansionary. 

The no-big deal viewpoint of my professors is shared by most Chinese: Their country is growing slower, but it is far from falling into an economic destruction. In short, the nation is just experiencing a rational slowdown needed to steer the economy into a healthier and sustainable growth path, which would mean more efficient utilization of resources and less pollution. 

Over the two decades, annual GDP growth in China has averaged around an impressive 10 percent, underpinned by mostly investments, as well as exports. 

As China's reliance over investments grows, its efficiency also falls, hence the long-run unsustainability of this growth model. As capital accumulates, the output-capital will trend lower, meaning that China would need higher and higher level of capital if it wants to record the same level of growth. 

For China to stubbornly rely on investments will only lead to piling up of debts, inefficient usage of resources and overexploitation of environment. This is why China wants to shift its growth driver away from investments, which now account for 46 percent of its GDP, to household consumption, which fills 36 percent of GDP (that's a meager level of consumption for the world's most populous country with 1.3 billion of population). 

Some of China's leading economic indicators, such as manufacturing index and factory output, are indeed slowing. However, those readings are sensible in a country where its government is now aggressively shutting down many factories and enacting various regulations to force industries to adopt cleaner, more efficient technology, in response to China's serious pollution problem. 

Chinese underperforming provinces that became the biggest laggards to national growth, for example, are either exposed to dirty commodities, or are known for their inefficient and polluting factories that make them soft targets of the government's environmental crackdowns.

For example, annual GDP growth fell to 2.7 percent in the first half this year in Shanxi, which is the country's top coal producer. Other Chinese provinces that also experienced sharp growth slowdowns were Inner Mongolia, which provides around one-third of China's coal supply; Hebei, a leading steel producer; and Heilongjiang, a manufacturing base with substantial oil production. 

Meanwhile, in the capital or other China's emerging provinces, growth remained robust, thanks to the booming service sector. GDP growth in Beijing, which has a population of 22 million, or twice Jakarta's, is expected to hit at least 7 percent throughout last year. Where in the world a crisis-threatened country still sees its capital growing by 7 percent?

Another possible reason why some provinces have reported lower growth than in recent years could also be related to the clampdown performed by the Chinese central government to regional leaders who are suspected to "inflate" their statistics (I've read reports saying output or investment figures in some provinces could be inflated by more than 20 percent).

This is because in China, regional leaders are appointed by the central government, not elected, and promotion or demotion will depend largely on their performance of managing their areas, which is indicated by economics statistics. Now, they might have to settle with reporting lower, but more credible, growth figures. 

China's economy has its defects, namely the lack of policy oversight, rampant corruption and the underdevelopment of its financial sector, among others. However, I see many fears about China were overblown as foreign media and economists take a too simplistic view by labeling its policy implementation inefficient, its economic future risky; just because China is a non-democratic country with an idiosyncratic policymaking approach. 

Quite the reverse, China's centrally planned economy, where all economic organs could be flawlessly steered to a specific direction, actually made it extremely efficient. The well-coordinated, communist-style implementation of fiscal stimulus in the aftermath of the 2008 global financial crisis was the reason why China could return to 10 percent growth only two years after the crisis - an economic recovery that is faster than any countries in the world.

For Indonesia, China is its largest trading partner and every economic developments in the Mainland would have a significant impact outlook for Indonesia's exports, economic growth and even its rupiah. The two countries were so heavily linked that the International Monetary Fund (IMF) has estimated that every 1 percent of slowdown in China could trim down Indonesia's growth up to 0.5 percent. 

Nevertheless, the situation in China might not be as scary as global policymakers imagine. Indonesia and the rest of the emerging markets world just have to deal with the "new normal" of global growth as the Asian giant seeks a slower, but more sustainable, economic expansion. 

The article was published in The Jakarta Post on Friday, January 15 2016