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  

It is neither an intelligence nor a diplomatic coup if China recently agreed to extradite a major corruption suspect to Jakarta with no strings attached.

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

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   

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  

China-US Showdown and Indonesian Foreign Policy

TWO TO TANGO. President Susilo Bambang Yudhoyono is reportedly not at the same wavelength with his Foreign Minister Marty Natalegawa on the US plan to build military base at Darwin, Australia. In contrast to the cucumber-cool Yudhoyono, the Australia-educated Marty insisted that the US Darwin plan would increase tension in Asia-Pacific region and create a "vicious cycle of mistrust" among neighborhood countries. 

(Photo by Ikhwan Yanuar)

Has Indonesian foreign policy transgressed from the initiative of the country’s founding fathers?

As the recent string of events in Asia-Pacific shows, the relevancy of Indonesian foreign policy of Free and Active (bebas aktif), which was once a landmark on how Indonesia dealt with its foreign policy matters in its post-independence era, is currently in question.

Strategically located in the heart of Asia-Pacific, a region where countries are currently busy stockpiling their economic wealth and bracing against each other to strengthen regional influence, early signs showed that Indonesia is currently in the brink of being insubstantial.

To lead is easier said to be done, especially when Indonesia is living in an embattled region whose influence is being fought by two powerful forces such as China and United States. Yet there is no doubt that Indonesia could do much, much better rather than “sit down and watch the battle between two giants unfolds” as its present stance suggests.

As the United States proceeds with its plan to establish a military base in Darwin, Australia, deploying roughly 2,500 US marines in the area, the standpoint of President Susilo Bambang Yudhoyono somewhat shows that Indonesia responds lightly to the issue.   

Foreign Minister Marty Natalegawa, who previously denounced the Darwin plan as “creating a vicious cycle of tensions and mistrust”, was reportedly at odds with his boss Yudhoyono. Apparently, Yudhoyono sided with US President Barack Obama, the Darwin plan’s initiator who was reportedly irked with Marty’s statements and directly assured Yudhoyono during the ASEAN forum in Bali that the Darwin military base, which was only 850-kilometer away from Indonesia, was “nothing special”.

Imagine having Soekarno instead of Yudhoyono as president; then the US would think more than twice to establish a military base in Darwin.

Economics affairs might not be the best expertise of Soekarno, who proclaimed Indonesian independence and became the country’s first president yet ended up being toppled from power because of his clumsy economic management. In terms of foreign affairs, however, Soekarno’s track record is historical: He successfully put Indonesia, a young country that only gained independence a few years back at that time, in the world map.

Despite his political ideology that was more frequently associated with communism and Soviet Union, Soekarno, impressively, still managed to earn reverence from the US as well. During his presidency, Soekarno was even deemed as a daunting figure to the US. At that time under the leadership of John F. Kennedy, the US tried to “win over” Soekarno from the Soviet Union’s hands by inviting the president to Washington and providing Indonesia with billions of dollars in civilian and military aid in the early 1960s.

Soekarno, however, impressively managed to remain impartial on the Cold War that pits the US and the Soviet Union, even leading the plan to intercede the hostilities between the two countries by establishing the Non-Aligned Movement (Gerakan Non-Blok) whose members comprised of third-world countries’ leaders.

Reflecting Indonesia’s scrawny stance on the US Darwin military base issue: does Yudhoyono lean to the United States? Or is he merely being insubstantial due to his weak leadership, especially when he was benchmarked to Soekarno? If both questions are answered with a “yes”, then it’s fair to say that Indonesia is not independent and not active –thus going astray from the nation’s highly acclaimed Free and Active foreign policy.

As the last troops of US military step out from their exhausting wars in Afghanistan and Iraq, the 2012 and after will be the years when the US will focus its foreign policies –as well as its multi-trillion dollar military budget– from Middle East to Asia-Pacific.  

Bolstering influence in the Asia-Pacific and ASEAN region is especially necessary for the US considering Obama is currently eyeing to execute the ambitious Trans-Pacific Partnership (TPP Free Trade Agreement); an economic deal that will include the US in the free trade agreement with ASEAN.

So far, six countries in the Asia Pacific region –China, India, Japan, Korea, Australia, and New Zealand– have implemented free trade agreements with the ASEAN. Considering ASEAN’s massive population and market potential, it is thus a rational strategy for the US to follow their footsteps in the mission to restore their tattering economy.

The world may usher the era of power transition with growing economies in the Asia-Pacific region, at the same time when the economies in the Europe and the US are declining. The boisterous economy of China’s especially leads Asia-Pacific region to become the world’s new centre of gravity, while ASEAN’s strong domestic market was also perceived as crucial to save the recession-plagued economies of Western countries.

For Indonesia, a nation that is frequently referred as the central figure in the ASEAN region, the year of 2012 would be pivotal. For Indonesian President Yudhoyono, this should be the year to revive the Free and Active foreign policy in the upcoming China-US encounter whose battleground will take place at the coruscating region of Asia-Pacific. 

China-US Relations: Why China Can't Bluff

BIG PLAYER. With US$ 1.6 trillion dollar of US treasury bonds in possession, China's Hu Jintao is betting big in United States and is being held hostage by Barack Obama and his economic policies.

The game of Poker expects the player with the strongest hand to raise the bet, control the opponents’ moves, and dictate the flow of the game.

So why could not China –as the biggest United States’ creditor with 1.5 trillion of US treasury bonds in hand– just dictate United States and tell Washington what to do? The riddle here is why China succumbed to the pressure from the United States in some of its economic policies –like appreciating its currency– whereas they supposedly have the power to direct Washington to conduct economic policies for Beijing’s benefit.

Onviously, China is anticipated to be acting something more like this: “You do what I say,” said Hu Jintao to Barack Obama, “or I’ll stop lending you money, I’ll stop buying your assets, and I’ll sell all these 1.6 trillion treasury bonds in instant.”

In fact, such conversation is not happening –because the situation is more complicated and some things are definitely easier to be said than done.

Holding 1.6 trillion of the US treasury bonds does not mean China is holding United States hostage –it could be, in some ways, the other way around. Instead of having a strong hand that allows its player to bluff and dictate the game, it turns out that the 1.6 trillion dollar US assets that China is holding right now is a devilish bug that limits Chinese policymakers from doing what they deem necessary for their economy.

In its effort to boost export and increase trade competitiveness, it is well known that People’s Bank of China –China’s central bank– has been continuously interfering the market by purchasing US dollars every time they deem the situation as necessary.

This policy ultimately leads to two outcomes. The first is the world’s economy is overwhelmed with Chinese currency, the renminbi, whose rate is excessively undervalued since there is way too much supply of the currency in the market.

The second is China hold too many foreign exchange reserves in their possession. Because China continuously purchase US dollars –and other currencies as well– and fill the market with renminbi, at the end of March 2011 China’s foreign reserves has accumulated to a astounding level of US$ 3.05 trillion; 60% of which (about US$ 1.6 trillion) composed of US dollar that comes mostly in the form of US treasury bonds.

The latter outcome is a condition that prompts a big-scale headache for Chinese policymakers at present.

If something happens to United States and their economy, China could not simply sell their US treasury bonds. Holding US$ 1.6 trillion of US dollar-denominated assets makes China the big player, hence if China sell its assets, other countries are more likely to follow suit. Eventually, this will drive down the value of China’s own assets and put their multi-billion investment at stake.

With an investment worth of more than a trillion dollar in United States treasury and institutional bonds –and some in the form of stocks–, it makes a lot of sense if the officials from Beijing are watching United States’ economic policies in vigilant state.

For example, a few months ago Chinese policymakers were infuriated to see their US dollar-denominated assets to decline in value because of the quantitative easing policy implemented by the officials of The Federal Reserve, United States central bank, who craftily depreciated US dollar to boost the United States export sector.

Just recently, the Republicans are losing their marbles as they are putting the world’s economy at bay by trying to push the United States economy into default in the protracted debt-ceiling negotiation against Barack Obama. The situation is serious: If a new bar of debt-ceiling is not set and United States goes into default, the US dollar will surely freefall and the Chinese, with its US$ 1.6 trillion of dollar-denominated assets in their stash, would be among the party that suffers the biggest economic losses.

The situation could go from bad to worse due to the fact that rating agencies like Moody's and Standard & Poor's have considered the possibility of downgrading the United States credit rating from its current rating (AAA) this year.

But, where to invest besides in US treasury bonds? No matter how worse the situation that engulfs US economy at present, the US treasury bonds remains the largest and the most liquid investment in the world. Moreover, amidst the deteriorating euro and the volatile yen, the fact that the US dollar is still considered as the world’s reserve currency should not be ignored.

At the moment, China does not really have better solution and alternative in this game. Eventually this makes any bluff from China to the United States meaningless –because the opponent, apparently, knows that China is betting loads of money in the pot with a very, very weak hand.

The Renminbi Blame-Game

I BOW TO YOU. As United States is running massive deficit on its trade balance at the moment, Barack Obama seeks help from his new foe Hu Jintao while crossing his fingers that China would be willing to help United States by letting the renminbi to appreciate.

It’s interesting to see that for the last few years the centre of gravity of the world’s economy has shifted radically from the west to the east.

In United States, the 2008 financial crisis that was caused by irresponsible bankers in Wall Street has led many countries to stop worshipping United States’ economy as their deity. In Europe, the failure of euro and the collapse of its adopters such as Greece, Ireland, and Portugal make the Europe’s economy no longer relevant to be seen as benchmark.

Countries such as China, India, Vietnam, and Indonesia look more powerful than ever. China, particularly, managed to reach a double-digit economic growth in 2010 and overtook Japan as the second-largest economy in the world. If China’s trend continues, it is even predicted that in 20 or 30 years time United States’s position as the world’s largest economy could be in peril.

And such stellar achievement does not go unnoticed: China’s growing force in its economy has left many western leaders –who have always had histories of looking down to their Asian counterparts– to put more strict attention on the country.

United States now deemed China as an important player in global stage. Hu Jintao’s diplomatic visit to United States in January 2011, for example, was met with more coverage from the United States media than ever.

What exactly is the major factor behind China’s rise today? Of all the far-sighted tactics and strategies of Chinese leaders, economists, and policymakers that have bolstered China’s economy until present; how Chinese central bankers peg the renminbi and keep the currency low has always been considered as China’s most brilliant –and controversial– economic gambit.

Currency devaluation leads to what some economic analysts call as unfair advantage for China. They claim that China is allegedly controlling its renminbi in its own favor at the expense of other countries’ economies, as the downpour of Chinese goods today is increasing their import numbers as well as hurting their domestic industries.

Of course, China’s strategy in keeping its currency low does not matter in the past when Chinese goods only held a small fraction of the world’s economy.

But in a situation like today when Chinese goods could be found in almost every corners in the world, it prompts massive headache for many policymakers in many countries: Citizens are becoming more dependent to Chinese goods, and thus many countries see a massive surge in import in that leads to trade deficit in their balance book.

Is China really the evil here? Criticisms regarding China’s international economics policy could be heard mostly from Americans: Both US President Barack Obama and his Treasury Secretary Tim Geithner has repeatedly launched searing attacks against China’s undervalued currency, while Nobel prize-winning economist Paul Krugman even described China as ‘bad guy in currency war who is to blame for the currency tensions as the cheap renminbi is contributing to global trade inbalances’.

This renders complicated problems for economic policymakers in many countries that import goods from China, especially United States, simply because their domestic industries could not compete with cheaper Chinese goods that are more preferable among the customers.

What deteriorates the problem is today many Chinese goods come in the same quality as American, therefore pushing some western goods in the sidelines, with almost no competitive advantage against exported goods from China.

In addition to hurting many countries’ domestic industries, the maelstrom of imported Chinese goods causes many countries to run deficits in their trade balances, as their import exceed exports number. It is reasonable if many world leaders massively denounce China’s act of depreciating the renminbi far beyond its real value, as this is simply not the right time for China to become so inconsiderate.

The world is still recuperating from the United States financial crisis in 2008; arguably one of the worst economic crises the world has ever seen. In fact, today not all countries have returned to their pre-crisis economic growth, yet China seemingly acts as the real villain whose undervalued currency and massive export numbers are causing global trade imbalances and rendering trade deficits among its trade partners.

But apparently, the argument of deeming China as the real evil here is a little bit too unfair.

The first question we ought to ask is: Why does China, after all the sweltering attacks from various countries, keep insisting in maintaining the renminbi undervalued? While many countries blast China’s acts as immoral during these tough times, it’s difficult to judge their actions as wrong or against the law however.

Keeping an eye on currency’s valuation is necessary if a country’s economy depends very much on its export industry; which is precisely the situation that China is currently in. China’s economy depends much on its export industry –so much that it was reported that in 2007 export in China accounts at a staggering level of US$ 1.22 trillion, or close to 40% of its total GDP.

China’s exports also shows a striking development, as China’s export alone have grown at 25% annual rate in the last decade, over the twice of growth of China’s GDP.

An economy that depends on export sector like China means its citizens also depend on the export industry –or mostly employed in factories or companies that focus on exporting items abroad. For China, it means that adjusting policies regarding its export industry –such as letting the renminbi afloat– is the same as playing with the fates of the Chinese citizens.

It is clear that by devaluating the renminbi, China is trying to make jobs and save its own citizens. For example, a research shows that total employment in China significantly increased by 7.5 million per year over 1997-2005, with export growth contributed at most 2.5 million jobs per year. The researchers also concluded that exports have become ‘increasingly important’ in stimulating employment in China.

Chinese policymakers, after all, are just doing what they have to do: Implement the best policy for their own citizens.

Of course, it is not to say that what China has done is morally justified in this post-crisis period; but it is also unfair to put a verdict that what Chinese policymakers have been doing is completely wrong. Today, the soaring economic growth of China has successfully dragged millions of Chinese out of poverty, and policymakers in China are merely implementing a policy to support its export sector, which provides jobs for million of Chinese and makes them better off.

Yet an economic superpower like United States is acting like a street beggar these days, pleading Chinese policymakers to pity them and help the country to overcome its massive trade deficit.

Why United States is acting so shameful like that goes beyond my comprehension. Well, China’s response regarding this US-China currency fallout is predictable, and it is represented at its best by the words from Yu Jianhua, a Director at China’s Ministry of Commerce, who said:

“Don’t make other people take the medicine for your disease.”

It's the Global Economy, Stupid

PUBLIC ENEMY. Barack Obama might not be popular during the G-20 summit following the decision of The Federal Reserve to pump US$ 600 billion to the US economy; a policy which will weaken the US dollar and propel more hot money inflows, inflation, and asset bubbles to the developing world.

As the United States President, Mr. Barack Obama surely has too many thoughts in his mind, doesn’t he?

The major overhaul in US healthcare system reflected Obama’s responsiveness in domestic policies and fulfilled his campaign promise, while the way he handled the British Petroleum fiasco in Gulf of Mexico indeed had satisfied the environmentalists.

In foreign policy matters there’s an urgent need to embrace the Muslim world after George W. Bush responded the 9/11 attack with waging wars here and there. The relationship has never been bitter: In Iraq, the US enraged many Muslim communities by demolishing the country because of the Weapon of Mass Destruction that never exists. In Afghanistan people still cry for more American troops to be deployed, arguing it is the US’s responsibility to fix the chaos that Bush once initiated.

But it seems Obama’s mind is being crammed with too many foreign issues that the US has to deal with –and the economy is not being put as his major precedence. Perhaps we could recall one of the most famous remarks in the history of United States politics, which was coined by Bill Clinton during the 1992 presidential campaign against George H. W. Bush.

That phase of Clinton’s emphasized the need to put economic issues as the most important priority among others. As Bush at that time gained fame among his voters because of his foreign policy developments, Bill Clinton, impressively, become the eventual winner the election thanks to his audacious –and effectual– campaign slogan: It’s the economy, stupid.

That’s what Obama should know, because the dreadful economy at present is definitely the reason why his Democratic party conceded a defeat against the Republican recently. Obama’s report card in the economy is a complete mess: In US currently unemployment rate soars higher than ever, and the multi-trillion dollar bailout is not actually effective to fix the situation or jumpstart the domestic economy either.

Also, Americans are not too interested with the revamp on regulations of Wall Street, as they urge Obama to put more attention to the jobless people who desperately look for dollars to feed their family on Main Street.

While Obama is not popular home, The Federal Reserve’s decision to boost the US economy by purchasing treasury bonds worth of US$ 600 billion and keep the interest rates at a historically low level may make him a more unpopular figure overseas.

Yes, Obama may be welcomed with ecstasy by Indonesians as he gave his speech in fully-packed hall of University of Indonesia’s. But surely unhappy leaders of G20 economies would not be that kind to shake his hand with such warmth as the Indonesians did –and they surely greeted him with sinister smiles on their faces knowing what the US had done to the global economy.

The US is the major perpetrator behind the recent currency wars, depreciating its dollar in order to make its exported goods more competitive abroad, as well as continually keeping its interest rates low to boost its economy. As if the historically low interest rates are not enough to cultivate hot money inflow and prompt headache among developing countries, now The Fed is looking to print US$ 600 billion more to the economy –a move that will surely increase the US dollar supply in the market, press the US dollar to depreciate further, and ultimately bring the new chapter of currency wars.

The United States is playing dangerous game here in implementing such self-centered policies like those because the consequences of the policy are likely to put the stability of global economy at bay. Depreciation in US dollar currently leads to a considerable corrosion in many countries trade balances, while a near-zero interest rate already stimulates a significant surge in capital inflow among developing countries.

And regarding the US$ 600 billion injection to the US economy: Is this a trade protectionism in disguise? Weaker dollar will eventually make US goods more competitive abroad; stabbing many US trade partners in the process. Countries around the world would not be so happy with this. “You blame me as the global economy’s hitman and now look what you’ve done,” says China.

Does Obama really need to come to G20 meeting anyway? While the global economy is still recovering from an economic mess which the US started, the G20 economy members are supposed to implement integrated and joint efforts to fix the global economy together, not the other way around.

Yes, the G20 group should work in cooperation; and that’s why it was formed at the first place. But now such commitment is in question because currently the group’s de-facto leader seems to be more interested in pursuing egotistic policies to save the his economy alone, not the world.

China: The New King in the Wings?

Yes, China’s ear-deafening economic engine is now pulling heads–but does it have the capacity to stay at such pace?

Whether China will be able to sustain its rapid economic growth and surpass United States as the world's largest economy remains anyone's guess. Just like China, in the past export-oriented powerhouses such as Japan and Germany were once tipped to accomplish the mission, but none of them is successful until present.

Amidst the storm from the recent financial crisis, which has seen most economies in the world to decelerate, little seems to be taking effect on China as its economy accelerates as fast as ever. Its economy grows to 11.9% in the first quarter this year, a staggering number which is far way ahead from its compatriots in the developing world could produce.

It is hard to deny the fact that China’s road to sustain its economic growth and become a future economic superpower is beset with thorny challenges ahead. Of all the upbeat forecasts of China, the sustainability of its economic growth in the long run is still in question, concerning the forthcoming predicaments.

First and foremost, China is dealing with serious problem on its ageing population. Because of the one-child policy, in the future Chinese working population will decline in number –and as the consequence, tomorrow labor in China would not be as cheap as they are today. As labor price rises and China’s industry becoming less competitive, investors will likely relocate their factories in other labor-intensive countries like Indonesia or Vietnam. With low-cost industry as the backbone that is responsible for the largest share of its economic growth, analysts predicted that China’s export-led growth model will be seriously disrupted by this demographic challenge.

Then, what else can be worse for a country than being blamed as the world’s enemy number one? That is what’s happening on China right now in terms of environmental issues, and this inconvenient situation can stand in the way of China’s ambition to keep its high economic growth long-lasting. Amidst global effort to reduce carbon emission, China now becomes the main perpetrator of the world by piling up pollution: in 2007, the country overtook United States as the world’s largest emitter and has seen a significant increase in carbon emission number since.

Environmentalists all over the world slam China as they deem the country is buying current economic growth at the expense of world’s future. And as time unfolds and its pollution grows, China will surely see more and more condemnations, which will put more pressure for Beijing to implement the green technology and apply strict measures to its dirty factories. These are costly and can reduce industry’s efficiency, and may possibly be the brake that hampers China’s economy from revving full throttle in the long run.

Also, China’s 10 percent-plus recent economic growth is mainly fueled by economic stimulus projects –a short term economic policy which the government implemented to prevent the economy from decelerating during the last financial crisis. And while the economic stimulus project is responsible for the significant swell of bank lending number and growth in credit these days –which instigates fears of the emergence of inflation and China’s property prices bubble–, the growth that it generates is indeed unsustainable in the long run.

Cool it the China way

Concerns regarding the matter have not fallen on deaf ears; with recent developments showing that Chinese officials and policymakers actually understand the threats that country faces no worse than the external observers.

If the main issue is short-term threat of economic overheating, some of the economic policies China’s policymakers implemented show their intention to put their economy in a safer, more sustainable level. In 2010, the Chinese central bankers are not so lenient in giving banks too much freedom. The amount of bank lending may have reached its peak last year, but this year reserve requirements have been repeatedly raised to prevent the market to be inundated with too much liquidity.

In the first quarter this year, China saw its housing prices to surge 10.7% –its highest since the last two years–, which instigated anxiety if the economy of China is experiencing an identical housing bubble problem as United States’. But China’s government has also started to implement restrictive policies on the housing market to cool its most overheated sector.

China’s recent decision to slightly loosen the currency’s peg to the dollar may be seen as the successful outcome of continuous pressure from various world leaders, but the truth is the implementation came cleverly just at the time when China desperately needs to cool its economy to prevent it from overheating.

Indeed, stronger renminbi may lead to less competitive Chinese goods in the global market (which is why this decision is strongly deplored by Chinese exporters). But during post-crisis period like this, loosening renminbi’s peg seems inevitable: at the time when other countries struggle to bounce back from global recession, you definitely do not want to be labeled as “global villain” whose undervalued currency and oversized export numbers continue to deteriorate other countries’ trade balances.

Another effort to encumber its too-fast economic growth can also be heard in the statement of Wen Jiabao, China’s Minister of Industry and Technology, who recently vowed to shut at least 2,000 highly-polluting factories that have not met environmental standards.

The statement is a fresh tonic for environmentalists; but what’s actually behind this? Because for some who remember how China’s representatives wrecked the Copenhagen deal by vetoing the deal of 50% global emission cut by 2050 to be taken out from the accord, how they suddenly change their mind may seem puzzling.

Applying strict environmental measures to Chinese manufacturers may decrease Chinese industries’ output, while loosening renminbi’s peg may possibly weaken China’s exports. But today China’s economy is very prone to overheating, and China’s ignorance towards environmental issues and its egoistic policy to maintain their currency undervalued start taking the headlines. At times like this, implementing policies which can cool down your economy and please the world’s citizens at the same time is indeed a very smart gambit.

Even though it’s still too early to call all these policies a success, reports show that economic growth in China has fallen to 10.3% in the second quarter, with both housing prices and bank lending amount also plummet. The sustainability of China’s economic growth is still in question, but the latest data on China’s economy should calm the world that Chinese policymakers are not unaware of their too strong economic growth and the downside risks that follow.

Crouching Eagle, Hidden Dragon

China’s recent achievement in overtaking Japan as the world’s second-largest economy is putting China in the spotlight as well as drawing attentions from many countries around the world –especially United States, the current frontrunner at the race that is checking his rearview mirror fretfully now because of the boisterous economic engine which Hu Jintao possess behind his car’s hood.

With Hu Jintao in the driver’s seat, previously China has successfully surpassed the economy of Britain and France in 2005, Germany in 2007, and Japan in 2010. Prophecies from oracles like PriceWaterhouseCoopers and Goldman Sachs, meanwhile, have predicted that between 2020 until 2030 the red car will overtake the star-spangled frontrunner as the world’s largest economy.

Yet sometimes to become number one “how” is a more crucial word to be addressed rather than “when”. It does not really matter when China will overtake United States as the world’s largest economy (in 10 years time in 2020 or 20 years from now in 2030). Actually what’s more crucial is how China can sustain its current growth and shunning their economy away from the looming threat of economic overheating, so they can ultimately sit at the top of the world.

One thing for certain is that China now is very different compared to 30 years ago, where its economy was still isolated from the world, as it currently stands right in the heart of the global economy. Now China plays an indispensable role in international trade: the number of goods they export around the world is staggering, and the gigantic demand from its 1.3 billion population became energizer to some recession-plagued countries which have been struggling to find buyer for their tradable items during the last financial crisis.

That’s precisely why China’s economic sustainability matters for the rest of the world: because if the car in red gathers steams and runs off the track, it will take the whole world with it. The commentators and racing pundits can utter everything they want to warn China against such upcoming threats, but so far it seems that the dragon and its rider understand and know exactly what they are doing.

Or are we seeing nothing yet and there’s actually more to come from China? Some of China’s immense potential, however, remain hidden and underestimated. The fact is; there’s a possibility that China’s engine will rev even louder in the future -political reform and information freedom are yet to be fully implemented, with China’s renminbi also waiting in the wings to be used as global currency.

With such menacing power possessed by the red dragon by now, the bald eagle has all the reasons to be worried.