The China Factor in Indonesia’s New Capital City Plan

Last month, Indonesia’s parliament passed a bill to relocate the nation’s capital from Jakarta to a remote area in East Kalimantan on the island of Borneo. The construction of the new capital city of Nusantara has prompted a good deal of debate in Indonesia, from the sheer cost of the project, estimated at $32.5 billion, to its environmental impacts on the surrounding region. Among the issues of controversy is how it will play into Indonesia’s complex relationship with China.

In recent months, some government critics have claimed the new capital city project will become a “New Beijing” due to the presumed Chinese involvement in its construction and the close ties between Jakarta and President Xi Jinping’s government.

This has been refuted by Suharso Monoarfa, the Minister of National Development Planning, who said that the new capital city will be open to anyone who is interested to invest, including investors from Japan, the Middle East, North America, and Europe.

However, it is apparent that the “China factor” will offer a significant side plot in the construction of the new capital, even if it is easy to exaggerate.

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One issue concerns the construction of a China-backed cement plant in the vicinity of the planned capital. According to the observations of Faisal Basri, senior economist at the Jakarta-based Institute for Development of Economics and Finance, this cement factory involves a number of irregularities, relating to the involvement in the project of Hongshi Holdings Group, a state-owned cement company from China.

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Hongshi Group’s activities in Indonesia date back to 2018, when it invested in a cement factory in Jember, East Java in collaboration with PT Semen Imasco Asiatic Indonesia, a project with an annual capacity of 3 million tons. Currently, Hongshi Group’s plans in East Kalimantan involve the construction of a plant that will employ 13,000 people and be capable of producing 8 million tons of cement per year.

According to Basri, the construction of this new cement plant raises questions about the Chinese government’s role in the development of the new capital city. The first is the simple proximity of the plant to the site of the new capital, allowing it to easily supply the needs of the massive project. The second, Basri claimed, is that the cement company could harm the local cement sector, given that Indonesia is currently experiencing an oversupply in the cement industry, with only 60 percent of its capacity currently being utilized.

He suggested that the new capital city should be able to absorb cement products from domestic cement factories, instead of using Chinese products. This has prompted the related question of whether the new factory is ultimately intended to advance the Chinese government’s economic interests over those of the Indonesian construction sector as a whole.

Questions have also surrounded the construction of the Indonesian Industrial Park (KIPI), a planned green industrial area in Bulungan Regency, North Kalimantan, not far from the new capital city, which is also reportedly mostly financed by Chinese investment.

In a statement during the inauguration of KIPI on December 21, President Joko “Jokowi” Widodo said that KIPI is expected to become the largest center of green industry in the world. This 30,000-hectare project, which was conceived during a visit by a delegation from China’s Ministry of Industry in 2017, is projected to ultimately attract some $13 billion in investment.

Investors from China and the United Arab Emirates are the main supporters of the KIPI project. Coordinating Minister for Maritime Affairs and Investment Luhut Binsar Pandjaitan has stated that there are as many as 10 big-name Chinese investors who are interested in becoming involved.

In addition, in 2019 Indonesia also collaborated with China in the construction of a hydroelectric dam on the Kayan River in North Kalimantan. This project was funded by the Power Construction Corporation of China to support the development of new renewable energy sources.

However, there are concerns about this green industry development strategy in the absence of a proper Indonesian government roadmap. Some have argued that the absence of a roadmap will enable the project to be easily exploited by foreign investors, given that there are currently no regulations on the extent of foreign investors’ involvement and ownership.

The selection of Kalimantan as the site for Indonesia’s new capital is also likely to facilitate increased Chinese investment in the island, considering that Kalimantan’s natural resources are both lucrative and abundant. This can be seen in various projects involving investments from China, including development projects in the energy sector.

In this case, the Chinese state-owned Gezhouba Group International Engineering Co Ltd is known to have worked on 12 development projects in Indonesia since 2006, including supporting infrastructure developments, such as hydropower, in North and West Kalimantan.

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In addition, the state-owned China Railways Construction Corporation is also interested in becoming involved in the development of Nusantara’s transport system. Three Chinese firms – the China Road and Bridge Corporation, China Communications Construction Engineering Indonesia, a representative of government-owned China Communications Construction Company Ltd, and the China Construction Eighth Engineering Division Corp – are also likely to participate in the tender for the construction of the toll road that will connect the port city of Balikpapan with Penajam Paser Utara, part of the area in which the new capital city will be located.

In addition to the port, Beijing also provided a loan to the Indonesian government worth 848.55 billion rupiah ($59 million) for the construction of a portion of the Balikpapan-Samarinda toll road in 2019.

While the argument that Nusantara will become a “New Beijing” appears exaggerated, it cannot be denied that China’s growing economic influence in Indonesia will translate into a prominent role in the development of the new capital. This is particularly the case given the significant Chinese investments in East and wider Kalimantan.

Therefore, from the discussion above, three important points must be noted. First, the government must ensure that it first uses products from domestic businesses to meet the needs of the new capital’s construction, for example, the use of cement, which is a concern for many parties. Giving permission for a foreign company to build a new cement factory in close proximity to the new capital when Indonesia has an oversupply does not send the right message.

Second, the implementation of green industry projects requires a clear roadmap to reduce the risk of exploitation by foreign parties which will be detrimental to a nation that has always closely defended its sovereignty over key natural resources. As Sukamta, a member of the Indonesian parliament, put it in August 2021, Indonesia’s abundant natural resources, especially in the areas surrounding the new capital city, could fall into the hands of foreign investors if no proper regulations are passed.

Third, while foreign investment can bring many advantages for Indonesia, including in the relocation of the capital to Nusantara, it also has the potential to increase the number of foreign workers into the country. Over the years, the entry of Chinese workers has sparked heated domestic criticism for reducing the opportunities for local workers, especially since many of them have entered the country illegally. As we know, negative sentiment toward Chinese workers among Indonesians remains quite high, and even the perception that large numbers of Chinese workers are entering the country could make the new capital project the subject of domestic political controversy.

Artmotion China

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