China has been included in the top 10 list of foreign investors in Indonesia since 2014. As in many other countries, China’s interest in Indonesia is in its energy and mining sectors: More than half of its total investment has been directed toward extract
Despite the recent economic downturn in China, this investment is expected to grow as part of the broader Asean-China Investment Agreement. Signed in 2010, the pact marks the implementation of the 2002 Asean-China Free Trade Area (ACFTA).
While the Indonesian government welcomes Chinese investment, it remains questionable if Asia’s largest economic powerhouse and the world’s second-largest economy can play by the rules of good governance, and social and environmental protection.
The Asean Investment Report 2013-2014 shows that Chinese foreign direct investment (FDI) flowing into Asean have significantly expanded in the past decade, ballooning from US$600 million in 2003 to $28 billion in 2012. This growth has concentrated mostly in extractive industries and infrastructure.
Additionally, the 2009 China-Asean Fund on Investment Cooperation (CAF) – one of the largest Chinese equity funds led by the Export-Import Bank of China – supports the expansion of Chinese investment in Asean and targets infrastructure, power, and oil and gas pipelines.
Why are the energy and mining sectors such a focus for China? Because they are at the core of China’s economic and national security. This may be an overstatement, but since the creation of China’s “Going Out” strategy in the late 1990s, its outward foreign direct investment has steadily increased, with its largest portfolios concentrating on fossil fuels and hard metals.
In 2014, in fact, outward direct investment surpassed foreign direct investment into China that for years had been its engine of growth
The most striking feature is that more than half of its investment approvals have gone to energy and mining projects around the world. Experts like Peter Buckley and Mark Casson argue that there is a strong link between energy and mineral endowments and China’s investment decisions.
Both sectors have become so important to China that instead of buying these resources on the international market, China is pursuing active state diplomacy to control their supply in resource-rich countries.
It means more aid, trade and investments, whether to a country with a poor human rights record or a failing state.
The Indonesian government certainly welcomes Chinese money; resource-rich countries are competing for capital amid the global economic slowdown and commodities slump. China is, of course, also suffering from the downturn. The unfettered demand for commodities we saw a few years ago might be tempered significantly.
However, studies suggest Chinese firms are relatively more resilient compared to their Western counterparts in this difficult global environment. One reason is that Beijing maintains some level of clout and protects state- and privately owned enterprises.
In addition, Western firms apply exchange-value to commodities – their value is monetised in prices relative to other commodities. It makes companies vulnerable to global market fluctuations and more likely to abandon their assets during times of low commodity prices.
Meanwhile, Chinese firms adopt use-value for commodities when they are used to sustain global production. So, despite low commodity prices, Chinese firms are less likely to abandon their operations than Western companies that cannot operate with significant losses.
This somewhat explains why Western investment in Asia has steadily declined as companies look for a more attractive fiscal and regulatory environment as well as large, untapped deposits.
Asian firms, predominantly Chinese companies, have increasing stakes in those assets.
However, emerging practices worldwide suggest that Chinese investors hardly play by global norms, such as by observing good governance and social and environmental protections. It is partly because Chinese firms have little international experience and have unclear safeguards regarding their huge overseas investments that are often in energy and mining sectors. Chinese firms’ foreign operations are more pragmatic, playing by the rules of host countries.
So in countries with weak governance, human rights and environmental standards, Chinese firms’ operations tend to exacerbate institutional paralysis.
This has been detected in the corruption and rent-seeking cases in Chinese extractive investments in Africa, violent conflicts with communities over a gas pipeline in Myanmar, and conflicts over pulp plantations and petroleum production in Indonesia.
Are their records changing? Some Chinese companies are striving to practise responsible behaviour. A report by the Extractive Industries Transparency Initiative (EITI) international secretariat shows that Chinese firms operating in EITI-implementing counties are becoming as transparent as other companies. In countries like the Democratic Republic of Congo, Nigeria and Mongolia, a majority of Chinese companies began disclosing some information on their beneficial, or real owners.
The Chinese government has also issued Guidelines for Social Responsibility in Outbound Mining Operations. The guidelines lay out standards on labour and environmental protection, supply chain due diligence and community engagement.
What this means in practice remains to be seen but the guidelines suggest that China is not adverse to playing by global rules.
Indonesia published its third EITI report last November. It reveals that revenues, social payments made by companies, production and export information and many other oil, gas and mining industries data are now available to the public.
Indonesia can use the EITI mechanism to strengthen governing rules for energy and mining that advance transparent management and corporate accountability in these sectors. Chinese investments can benefit from these rules.
As Chinese investment gradually abides by good international practices in the context of the just-launched Asean Economic Community, regional leader Indonesia and China can work together to foster a new Asian century that champions a culture of good governance and corporate accountability.
Great power should come with greater responsibility.
Emanuel Bria is the Asia-Pacific senior officer at the Natural Resource Governance Institute. Poppy S Winanti is the head of the International Relations School, Gadjah Mada University.