SINO-INDONESIAN TIES -- CAUTIOUS BUT INCREASING

C O N F I D E N T I A L SECTION 01 OF 06 JAKARTA 003439

SIPDIS

SIPDIS

DEPT FOR EAP, EAP/MTS, EAP/MLS, EAP/RSP, EAP/CM, EAP/TC
NSC FOR E.PHU
SECDEF FOR USDP/ISA/AP P.IPSEN

E.O. 12958: DECL: 12/19/2017
TAGS: PREL PGOV PARM ECON ID CH
SUBJECT: SINO-INDONESIAN TIES -- CAUTIOUS BUT INCREASING
ENGAGEMENT

Classified By: Pol/C Joseph Legend Novak, reasons 1.4 (b+d).


1. (C) SUMMARY: China is becoming an increasingly important
player in Indonesia. It has incipient defense cooperation
relations, and growing trade, investment and cultural ties
with Indonesia. Taiwan and historical legacies complicate
relations, while Indonesia's Chinese community offers a point
of contact. Indonesia is concerned that--with the U.S. at
times preoccupied elsewhere in the world--China's influence
in the region may grow even stronger with negative
consequences for the Asian strategic balance. Concern over
the rise of China creates an opportunity to build stronger
U.S./Indonesian relations. The USG should support the GOI's
strategy of using ASEAN as a tool to help maintain a balance.
END SUMMARY.

CHINA AS A "STRATEGIC PARTNER"


2. (C) Indonesia characterizes its relationship with China
as a "strategic partnership" and a document formally
establishing this relationship was signed in Beijing in July

2005. Two rounds of strategic talks have been held annually
since 2005, according to GOI officials. The most recent
talks--which occurred in Beijing on November 27-29 at the
sub-ministerial level--were led by the Department of Foreign
Affairs and included officials from several economic
ministries and a private-sector delegation.


3. (C) Indonesia has concluded strategic partnerships with
other countries in the region, notably India (2005),Japan
(2006) and South Korea (2006),and refers to its relationship
with the United States by the same term. DEPLU contacts say
strategic partnerships consist of three major components:
political and security; economic and developmental; and
social and cultural cooperation. These strategic
partnerships are supplemented by a so-called "Plan of
Action," which Indonesia is in the process of drafting with
China. Critics assert that the term "strategic partner"--as
Indonesians use it--is watered down simply to mean key
countries that Indonesia wants to have closer relations with
and not much more.

ASEAN IN THE MIX


4. (C) China is actively engaged with ASEAN at multiple
levels and has been receptive to ASEAN's growing role as a
regional organization. For Indonesia, ASEAN is the primary
framework for dealing with China on regional security issues.
Indonesia and its ASEAN neighbors have agreed to use this
framework in order to develop a uniform approach on regional
security. The ASEAN framework consists, GOI officials
suggest, of concentric circles beginning with ASEAN itself,
whose members are bound by the Treaty of Amity and
Cooperation (TAC) and will in the future be bound by the new
ASEAN Charter, once it is ratified.


5. (C) The second circle is the East Asian Summit (EAS),
with ASEAN 1 and ASEAN 3 serving as something like
intermediary spokes between ASEAN and EAS. A third circle
involves dialogue with East Asian and other partners in the
Annual Ministerial Meeting (AMM),Post-Ministerial Summit
(PMS) and ASEAN Regional Forum (ARF). ASEAN is thus the core
of three concentric circles. Another metaphor cited by GOI
officials for the strategy is an airplane, ASEAN being the
body, East Asian partners like China and Japan the wings, and
EAS partners (Australia, India and Russia) the tail. All
parts are needed in order for the airplane to fly, but ASEAN
remains in the driver's seat.


6. (C) Indonesian officials emphasize that these
ASEAN-centered regional structures provide a framework for
dealing with China's growing influence in the region. Having
signed the TAC, China can be considered a friend, GOI
officials stress. At the same time, China needs to be
integrated into regional structures so as to maintain a
balance in which the national interest of Indonesia and its

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ASEAN neighbors can be preserved and protected.

TAIWAN


7. (SBU) Indonesia's continuing unofficial relations with
Taiwan remain important for Indonesia and are a complicating
factor in Indonesia-PRC relations. In re-establishing
diplomatic relations with the PRC in 1991 after years of
tension, Indonesia preserved its economic and cultural ties
with Taiwan, which remain active. Taiwan is still
Indonesia's fifth-largest foreign investor, with over 7000
Taiwanese businesses in Indonesia. Indonesian exports to
Taiwan include mineral resources, seafood, clothing and
electronics manufactures. An active Taiwan Friendship
Association in the Indonesian national legislature (DPR)
continues to lobby in favor of Taiwan ties.


8. (C) Two transit visits by Taiwan President Chen Shui
Bien, to Bali in October 2002 and to Batam Island (near
Singapore) in May 2007, drew strong Chinese protests. China
demanded in both cases that Indonesia adhere to the one-China
policy and allow no further "unexpected visits." The
Indonesian government publicly voiced regret over the second
incident. It remains unclear how Indonesia will handle such
Taiwan requests in the future.


9. (C) Taiwan representatives in Jakarta have pointed out to
us that China actively competes with Taiwan's public outreach
events and promotions around Chinese New Year and other
holidays and major events. In addition, China increasingly
uses cultural events to conduct political campaigns against
Taiwan independence and claims to official international
status.

THE DALAI LAMA, ET AL


10. (C) In addition to Taiwan, several other "residual
issues," as GOI and Chinese Embassy officials describe them,
complicate relations with China:

-- DALAI LAMA VISITS: The Dalai Lama was planning to visit
Indonesia in 2007. China weighed in strongly in advance
against the visit, which eventually was postponed. The issue
of whether the Dalai Lama would ever be allowed to visit was
left unresolved and officials say there is now a possibility
the Dalai Lama will seek to visit in 2008.

-- IMPORT BANS: Indonesia has in the past year banned
several Chinese exports, among them food products, because of
health and safety concerns. China has protested the bans and
threatened to retaliate against Indonesian exports.

-- REAL ESTATE CLAIMS: There is a continuing dispute over
the ownership of real estate in North Jakarta which had been
the site of the Chinese Embassy before relations were broken
in 1965. The new Chinese Embassy stands on a different site
but China still claims ownership of the older property. The
claim is being contested in the courts. In a meeting with
Pol/C, the Chinese Embassy Pol/C--through clenched
teeth--said China considers the resolution of this issue as
"important" and needs to be resolved "in the context of
confirming our friendly relations with Indonesia."

GROWING TRADE AND INVESTMENT


11. (SBU) The bilateral trade relationship is growing
rapidly, increasingly reaching the dominance that Japan
enjoyed several decades ago. Bilateral trade is projected to
reach $20 billion in 2008 and $30 billion in 2010. Currently
the balance is in Indonesia's favor, although there is
considerable concern that Chinese goods could swamp
Indonesian markets and displace Indonesian competitors at
home in the future. A Joint Commission on Trade exists to
resolve trade differences.


12. (SBU) China and Indonesia enjoy a robust and growing

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economic relationship centered primarily on oil, gas,
minerals, palm oil, and rubber. Total trade for the first
half of 2007 was $10.2 billion with a modest $714.6 million
surplus in Indonesia's favor, according to the government
statistics bureau. China is the fifth largest export market
for Indonesia behind the EU, Japan, U.S., and Singapore. Oil
and gas account for the largest segment of Indonesia's
exports at $1.7 billion during the first semester 2007. Palm
oil was the largest non-oil and gas export in 2006 with $637
million. China is the second largest source of imports for
Indonesia behind the EU, accounting for almost 13 percent of
imports in 2006. Capital goods account for the majority of
Indonesia's purchases from China.


13. (SBU) Chinese companies are engaged in a frenetic search
for energy and mineral resources in Indonesia, and the deals
in these sectors tend to dominate bilateral commercial
relations as well as the business news headlines. Chinese
firms are making aggressive bids to secure coal exports from
Indonesia, as well coal mines. On November 26, China's
biggest coal producer China Shenhua Energy announced a $4
billion bid for a controlling stake in PT Adaro, Indonesia's
number-two coal producer, according to business press
reports. Adaro management has declined to confirm or deny
receipt of an offer, saying only that it had "interesting
prospects." China Railway and China International Trust and
Investment Corporation also announced in March that it would
invest between $490 and $720 million in coal transportation
infrastructure in Sumatra and Kalimantan.


14. (SBU) In the electricity sector, Chinese firms won the
contracts for eight of the ten major projects in the GOI's
fast-track electricity building program to add 10,000 MW of
new generation capacity by 2010. Chinese Energy giant CNOOC
has several production sharing contracts in Indonesia and has
recently been mulling publicly whether to buy three more from
Indonesian firm Medco. CNOOC is also in ongoing discussions
with the local Sinar Mas group over a 51 percent stake in a
$5.5 billion biofuels project. The two parties signed an MOU
in January.


15. (SBU) CNOOC also owns almost 17 percent of BP's $5
billion Tangguh LNG project in Papua. The project will
produce 7.6 million tons per annum when molecules begin
flowing in late 2008/early 2009. Pertamina's $3 billion deal
with Sinopec to construct a new oil refinery in Tuban, East
Java, was revived in April after many years of delay. It is
now on hold again due to declining domestic oil production
and skyrocketing construction costs.

THERE IS SOME FRICTION


16. (C) The Sino-Indonesian commercial relationship does
feature considerable friction, however. Many GOI energy
officials have expressed chagrin at the poor quality and
meager local employment from power plant construction by
Chinese firms. One state electricity executive told us that
the Chinese had hired virtually no Indonesians for the
Cilacap power plant project, which came on-line in 2006.
Virtually all the construction material was sourced from
China, including the wire and bamboo temporary fencing. The
Cilacap power plant has also been mired with operational
problems, rarely offering more than 40 percent availability
since coming on-line. Chinese hardball negotiating tactics
for GOI guarantees for the 10,000 MW electricity building
program also reportedly bruised Indonesian feelings. After
competitors walked away from participation in the original
tender because of the GOI's steady refusal to offer
government guarantees, the Chinese won the contract, only to
force the GOI into providing guarantees after more than 18
months of stalled progress on power plant construction.


17. (C) State mining company PT Aneka Tambang is one of many
Indonesian companies which have abandoned the search for a
Chinese partner. In March, Antam said it was looking for a
new partner for its proposed $250 million aluminum smelter in

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Riau after Chinese firm Xinfa Aluminium Corporation tied
unreasonable conditions to its investment. We also
understand from several sources that the CNOOC-Sinar Mas
biofuels deal negotiation is also quite contentious and
perhaps may never come to financial closure.


18. (C) As one of the chief consumers of Indonesian raw
materials, China is a major factor in the Indonesian problem
with illegal logging, fishing and other illicit activities.
The absence of a corrupt practices act in China and its
enormous appetite for resources gives Chinese companies
little incentive to cooperate in reining in this sector.

DEFENSE COOPERATION STILL LIMITED


19. (C) Indonesian Defense Minister Juwono Sudarsono and
Chinese Defense Minister Cao Gangchuan signed a defense
memorandum of understanding on November 7 in Beijing.
Sudarsono stressed that this was not a mutual defense pact
and that Indonesia preserved its "free and active" foreign
policy (a codeword for "non-alignment"). The agreement,
titled "Indonesia-China Cooperation on Defense Activities,"
covers student training and exchanges, military exercises,
technical cooperation (with some transfer of defense
technology),and procurement of defense equipment.
Arrangements of this level do not require ratification by the
national legislature (DPR). The agreement essentially
formalizes existing cooperation.


20. (C) As things stand now, Indonesian defense cooperation
with China is still quite limited. Training, education and
exercises reflect a basic commitment to partnership, while
procurement is ad hoc and based on specific Indonesian needs
rather than any systematic strategy. Cooperation includes
the following:

-- Training and education ranges from basic through to
advanced courses. TNI officers attend China's military
college, while China has one student in the Indonesian Army
Staff College and will likely begin sending officers to the
Naval and Air Staff Colleges, as well as the TNI War College;

-- Military exercises focus on capacity building at the
platoon level. The cooperation agreement does not specify
exercise themes, but China is interested in commencing
maritime security exercises, with a focus on the Malacca
Strait; and,

-- Procurement of defense equipment from China remains
limited and ad hoc. The 2005 agreement provides for the
installation of a small number of C-802 Anti-Ship Cruise
Missiles on Indonesian Navy ships, a project which is nearly
complete. There have been discussions to provide
helicopters, a K-8 Advanced Jet Trainer to replace older Hawk
MK-53 trainers. China has also offered financial assistance
for shipyard construction in cooperation with local defense
contractors, although no contracts have yet been signed,
according to Mission DAO contacts.

THAT ETHNIC LINK


21. (SBU) Indonesia's ethnic Chinese community--which is
estimated to be roughly two to four percent of the
population--consists of Chinese who immigrated long ago and
have become extensively integrated into Indonesian culture,
and other Chinese who arrived after the Second World War.
These latter elements, largely Fujianese and Hokkien, fled
Communism and--often with President Suharto's
patronage--quickly amassed huge fortunes. Ethnic Chinese,
particularly the more recent arrivals, tend to be Buddhist or
Christian. Since Deng Xiao-ping's reforms and the
normalization of diplomatic ties with Beijing in 1991,
Indonesia's Chinese business community is increasingly doing
business with China. The presence of an Indonesian Consulate
General in Guangzhou and the plans for one in Shanghai
reflect this reality.

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NEGATIVE LEGACIES


22. (SBU) The different historical experiences of the two
countries, as well as the presence of an ethnic Chinese
community in predominantly Muslim Indonesia, shape
Indonesia's relationship with China. China has in the past
represented both an internal and external threat to
Indonesia. Indonesia's experience with Communism culminated
in riots and the violent suppression of the Indonesian
Communist Party (PKI) in 1965. Traumatic events like the
attempted coup within the Army in 1965 and subsequent mass
killings, including of Chinese, and the anti-Chinese riots in
Jakarta in 1998 are still vividly remembered, and
discrimination and distrust between the "indigenous" (Muslim
Malays) and (the invariably wealthier) Chinese Indonesian
communities linger.


23. (SBU) A major improvement in the ethnic equation
domestically followed from President Abdurrahman Wahid's
decision in 2000 to allow greater freedom of cultural
expression to Chinese Indonesians. They were for the first
time allowed to establish schools and study Mandarin, publish
and circulate Chinese-language newspapers and publicly
observe traditional festivals such as Chinese New Year. A
further step occurred in 2006 with the passage of a law
allowing dual citizenship, which eliminated the long-standing
official differentiation between "indigenous" and
"non-indigenous" Indonesians, which Chinese Indonesians
regarded as discriminatory.

USING "SOFT POWER"


24. (SBU) With the restoration of relations in 1991 and the
growth of mutually beneficial economic relations, cultural
and other ties have steadily improved between Indonesia and
China. The improved atmosphere has given China the
opportunity to exercise its influence through "soft power."
That said, China has been slow to exploit cultural,
educational and media engagement. China-sponsored
scholarships and cultural exchange programs appear to be
quite limited in number and low-key in nature. The official
website of the Chinese Embassy in Jakarta contains virtually
no information about cultural or educational affairs, though
it has some press releases in Indonesian. The Chinese
Embassy and its staff are active and, by all accounts, quite
effective, however, and its diplomats often speak fluent
Indonesian.

WE HAVE A ROLE


25. (C) The USG has a vital role to play in this mix.
Indonesia is clearly watching China carefully, understanding
fully that its neighbor to the north is growing wealthier and
increasingly powerful. Given this, Indonesia wants to ensure
that it maintains solid relations with China. At the same
time, Indonesia is a proud country and does not want to be
dominated by anyone. Indonesia is concerned that--with the
U.S. seemingly preoccupied elsewhere in the world at
times--China's influence in the region may grow even stronger
with negative consequences for the Asian strategic balance.


26. (C) We should continue to take advantage of this opening
caused by China's rise to further improve our relations with
Indonesia. The USG should support Indonesia's strategy of
using ASEAN as a tool to help maintain a balance, for
example. As we do so, we need to keep in mind that
Indonesia's "free and active foreign policy" likes low-key,
non-confrontational approaches and will not support any form
of "neo-containment." If handled carefully, however,
Indonesia can be a key ally in trying to ensure that the rise
of China is a peaceful, integrative one. We should continue
to cooperate with Indonesia in order to support that
objective. The GOI, for example, appreciated recent DoD
briefings regarding China and has requested more.


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