Introduction
Since the Xi Jinping presidency started, China has undertaken major domestic monetary and fiscal reforms to maintain China’s centrality to the region’s economy. The Middle Kingdom may have faced an economic downturn lately, but its government has taken proactive steps to ameliorate the situation.
The latest pronouncements by the Chinese government regarding its economy are meant to strategically signal its resilience while also restoring market confidence from those in Southeast Asia and beyond.
China’s Economic Reform and Regional Opportunities
The 26 September 2024 session of the Political Bureau of the Communist Party of China Central Committee stressed the importance of such executive measures as cutting the reserve requirement ratio (RRR) and altering the mortgage rate. The Bureau deemed these necessary to stimulate the property sector and improve the financial outlook.
Such policy shifts are a realistic response to the regional context, opening opportunities for Southeast Asian countries such as Indonesia to deepen their engagement with China’s economy and seek out cooperative benefits.
The announcement that China will inject approximately 1 trillion yuan into the financial market and reduce the reserve requirement ratio by 0.5% underlines China’s intention to enhance liquidity and promote growth in the economy.
In a way, such measures aimed to reinforce the soundness of China’s financial markets and reassure its regional allies that Beijing remains committed to stabilize its economy irrespective of external and internal headwinds.
The effect of the policy was immediate and broad, as seen by the Shanghai Composite Index increasing by 4.59%, the Shenzhen Component Index increasing by 9.17% and the technology-biased ChiNext surging 17.25% after the National Day holiday reopening.
Joint trading volumes reached new heights, totaling 3.45 trillion yuan on the Shanghai and Shenzhen exchanges, surpassing the former high of 2.6 trillion yuan. This demonstrates the effectiveness of China’s regulatory reforms to restore investor confidence and increase economic activities.
Many in China must feel optimistic about the Chinese real estate market and for good reason. Beijing’s attempts to solve problems within the sector, which constitutes an essential part of China’s economy, include cutting the opening down payment for new residential mortgages from 25% to 15%.
These mortgages, which are expected to relieve loan burdens to around 50 million households and bring older mortgage rates up to the current standard, are predicted to save the country large amounts of resources, approximately 150 billion yuan annually. The significance of such crucial measures is also to help reverse the continuing decline of the real estate market within China.
By bringing back the property market, it has been reported that the primary goal the Beijing government seeks to achieve is enhancing the domestic economy. Most significantly, it creates the conditions for more effective regional economic integration since a strong economy in China is a powerful engine of growth for co-development with others in the region.
Complex Interdependence
Southeast Asia stands to gain considerably if China undergoes an economic revival. The revival of the A-share market has seen an increase in demand from foreign investors, which is likely to result in many investments in the Southeast Asian markets.
This is especially pertinent for countries like Indonesia, which has received Chinese FDI in the development of critical infrastructure. For instance, China’s intent to improve regional connectivity – which was demonstrated with projects like the China-Laos Railway – offers prospects for other investments that would enhance Indonesia’s trade and integration in the region.
China’s development of the town of Mohan – an important border site is situated in Yunnan province (a vital connecting point between China and Southeast Asia), underscores China’s pledge to promote regional economic development and joint progress. This development aptly exemplifies China’s openness to enhance economic relations with the rest of Southeast Asia.
Moreover, with its dominating position in the foreign trade, China has also emerged as an integral component in the regional economic system. The total volume of the foreign goods trade reached US$5.88 trillion in 2023, which means it accounted for 12.4% of the total global trade.
China has managed to retain its position as the most dominant trading nation in the world for the seventh year in a row and this only goes to reinforce its standing in terms of regional trade. Furthermore, with a service trade volume of US$933.1 billion, Southeast Asian countries have the capacity to gain economic benefits by engaging in a deeper trade relationship with China.
These figures show that there is still a need for countries such as Indonesia to engage themselves passively with China’s developmental strategies, such as the Belt and Road Initiative (BRI), which has the potential to increase trade volumes and create new markets.
The increasing economic ties of China with Southeast Asia may be understood in the context of the complex interdependence theory, which states that as states become more interlinked economically, socially and politically, the probability of conflict decreases because it is too costly.
This model helps us comprehend why it may be in the interest of some Southeast Asian countries like Indonesia to become more integrated with the Chinese economic model, which would, in return, enable the creation of a more constructive and harmonious regional context. By implementing an interdependence model, regional economies can avert risks of instability and promote joint growth, which ensures that all parties benefit.
Challenges
Nonetheless, developing more active economic engagement with China is not without problems. Greater economic engagement means that any policy shift or economic activities derived from China will have implications across the region.
For Indonesia, which is a major recipient of Chinese investment in key sectors such as infrastructure, manufacturing and real estate, this dependency poses hazards as variations in Chinese investments tend to import volatility to the local market and economies.
China has taken steps such as issuing extremely long-period treasury bonds as well as special local government bonds to help stabilize shocks to its financial and real estate markets. These measures indicate that China understands that its activities affect the economy of the region; Southeast Asian countries can rest assured that China is mindful of its potential pitfalls.
However, while the increased flow of Chinese capital into Southeast Asia is critical for meeting the financial needs of development projects, it can also imbalance the markets and stifle efforts to improve local capacity.
Therefore, Indonesian authorities are required to manage foreign investments, including foreign capital coming from China, to ensure that these investments are aimed at achieving sustainable development goals that will benefit its domestic economy.
Recent crises such as the crash in Indonesia’s textile industry – due to massive capital inflow and import of textile products from China – exemplify this concern. Such cases further underscore the need for Indonesia to erect some rules and regulations that could shield local industries.
Constructing a legal regime that encourages cooperative ventures and technological transfer would allow Indonesia’s enterprises to utilize Chinese capital in a more efficient manner, resulting in development without surrendering control of essential sectors and assets.
Strategic options for ASEAN and Indonesia
To deal with the economic resurrection of China, Indonesia and its ASEAN peers should take a more aggressive stance, allowing for deepened economic cooperation while diversifying their economic relations.
With shifts from primary commodity export reliance to developing core sectors such as manufacturing, technology and services, Indonesia could skillfully integrate itself within regional supply chains with China at the center.
For instance, rather than chiefly importing finished goods, Indonesia could aid in China’s production networks by establishing its own electronics and automotive components industries. Predominantly, this strategy would assist Indonesia’s economy by retaining more foreign earnings but majoring in the core activities of such industries.
However, to avoid being “swamped” by imported goods, Indonesia does require a framework of policies to aid domestic industries, especially in their formative stages including trade standards and promotion of sectors where it has a comparative advantage. Such strategy could attract more foreign investment into Indonesia and improve the country’s economic position.
Central to this strategy is financial regulation and financial stability. Indonesian policymakers must concentrate on building sound financial institutions and laws that will adequately absorb the sudden influx of Chinese capital while reducing risks associated with volatile capital inflows.
Reinforcing its financial control and risk management policies will allow Indonesia to withstand almost any impact even after internal changes in Chinese policies.
There is a great need for ASEAN to pursue better economic integration with China. When bargaining with Beijing, especially in regards to the BRI, ASEAN ought to seek to remain true to the ASEAN centrality and encourage a more even distribution of Chinese investments around the ASEAN countries.
However, such commonality of purpose is not easy due to the very diverse political and economic structures within ASEAN. For example, Malaysia’s engagement with the BRI projects has demonstrated the extent to which such investment can be politicized which hampers ASEAN’s effort to voice out as a single entity.
To ensure ASEAN centrality vis-à-vis these complexities, the bloc could seek to focus on developing broad parameters, which would enable them to promote common interests within the region. This would guarantee a united regional position on engagement with China while ensuring that individual member countries are allowed the leeway to pursue bilateral deals that suit their domestic variables.
ASEAN Member States can leverage regional projects that foster infrastructure development, technological advancement and agricultural growth in a manner that is sustainable for the region. Such a position would enable these countries to engage China in a manner that is beneficial to them, alleviating excessive dependency on Chinese capital and promoting a coherent as well as cohesive regional economy in the process.
Conclusion
To sum up, as a result of recent changes in the strategies of the Chinese authorities, Southeast Asia and Indonesia have been presented with a new opportunity to enhance their economic relations with China while fostering their own economic advancement.
The region’s response should be neither too cautious nor too aggressive in order to augment its integration with China while improving its strategic stance. Since China’s economy is now poised to expand steadily, there is an opportunity for ASEAN to establish itself as a regional bulwark that focuses on regional economic progress and stability.
