Indonesia’s next juncture: Facing China’s decline

October 4, 2024

JAKARTA – As China’s economic engine begins to sputter, Indonesia finds itself at a critical juncture. The intricate economic relationship between these two nations, characterized by substantial trade and investment flows, now presents both challenges and opportunities.

With the global economic landscape shifting, it is imperative for Indonesia to reassess its strategies and navigate these uncertain waters with caution.

For decades, China has been the world’s fastest-growing major economy, driving global growth and providing a significant boost to fellow emerging countries like Indonesia. However, recent forecasts paint a starkly different picture.

The International Monetary Fund (IMF) projects that China’s GDP growth will dwindle to just 3.3 percent by 2029, a sharp decline from the double-digit growth rates that once characterized its economic rise. This deceleration is not a temporary blip but a reflection of numerous deep-seated issues, an ongoing property crisis, a staggering debt burden, increasing government control and a rapidly aging population.

These developments will inevitably affect Indonesia, which has China as its largest trading partner and is a major recipient of Chinese foreign direct investment (FDI). In 2023 alone, China accounted for over 25 percent of Indonesia’s exports and contributed to more than 14 percent of its total FDI inflows. An analysis of GDP growth from 1961 to 2023 reveals a significant alignment between the economic performances of Indonesia and China, particularly after 1998, when both countries embarked on transformative economic reforms.

A recent study by IFG Progress on the Indonesia-China economic interrelationship suggests that a one-percentage-point increase in