Is Indonesia Turning Against China?

 

Three recent decisions by the Prabowo government are likely causing concern in Beijing. The first two have military implications, while the third highlights the economic risks China faces when investing in countries it considers friendly.

A Realignment of Indonesia’s Foreign Policy?

A few months ago, Indonesia and the US discussed a proposal to give US military aircraft broader access to Indonesian airspace. Although Indonesia’s Defence Ministry claims the proposal is still under review and no binding agreement has been reached, it may effectively be a fait accompli.

When the news broke, I found it hard to reconcile this apparent shift with President Prabowo Subianto’s earlier rush to attend China’s September 2025 Victory Day Military Parade in Beijing — a trip initially postponed due to domestic unrest. That gesture had given China the impression that Prabowo is a geopolitical realist and a potential partner.

China will likely be unhappy about US overflight rights, but before Beijing could formally react, Indonesia announced another significant move. It has now agreed to a US request to establish a maintenance hub for US military C-130 Hercules aircraft on its soil. Prabowo has approved the plan, designating Kertajati Airport in West Java as the proposed location.

This decision followed the elevation of bilateral military relations to a "Major Defense Cooperation Partnership" (MDCP) in April 2026. The framework formalizes collaboration on military modernization, joint exercises, and logistics support.

Is Indonesia realigning its long-standing non-aligned foreign policy?

A key concern is that the facility could evolve beyond a maintenance centre. If the hub is exclusively for supporting US military operations in Asia, it could be perceived as a US military base in Indonesia, potentially dragging the country into broader geopolitical conflicts.

While the government insists the initiative aims to strengthen Indonesia’s domestic defence industry, the hub is a concrete outcome of the upgraded April 2026 defence partnership.

Indonesia straddles some of the world’s most important maritime chokepoints, especially the Strait of Malacca. Easier US military access to Indonesian airspace and deeper maritime cooperation could improve US monitoring and operational reach around the Malacca Strait and surrounding seas — developments China would view as threatening.

As US-China rivalry intensifies, Beijing is likely to be extremely unhappy with such hedging by Indonesia. From China’s perspective, balancing trade relations is one thing, but jeopardizing China’s military interests is a red line — much as with Japan and the Philippines. China expects neutrality from its neighbours.

Time to Squeeze China Economically?
On May 20, Prabowo claimed that Indonesia lost nearly US$1 trillion in resource wealth over 34 years due to deceptive trade practices. That same day, he unveiled a set of new export controls. A special state-owned enterprise named Danantara Sumberdaya Indonesia (DSI, a subsidiary of the sovereign wealth fund Danantara) has been appointed as the sole exporter.

From June 1 to August 31, 2026, companies must begin transitioning their transactions to DSI, which will handle all contracts with foreign buyers. Effective September 1, 2026, DSI assumes full responsibility and authority for all export activities of these commodities. Exporters will receive payment only after passing through a new state-controlled "gate", designed to allow the government to verify every transaction.

The government has outlined a two-phase rollout. But does DSI have the experience and financial muscle for such a task? One estimate suggests that managing Indonesia’s coal exports alone could require around US$31 billion in working capital.

Could DSI become another "clove" monopoly like those during Suharto’s era, where cronyism and corruption thrived?

The DSI policy appears noble in intent, but it also targets both Indonesian-Chinese tycoons and China. Of course, Indonesian-Chinese citizens must be loyal to Indonesia’s interests, and they will need to negotiate mechanics with the government if they find the policy counterproductive.

However, it is the new policy’s impact on the nickel industry that has shocked China. Chinese enterprises invested roughly US$14 billion to build smelting facilities in Indonesia in compliance with previous policies. Now they face a new policy that will not only increase ore costs but also affect production and export entitlements.

Indonesia is changing the rules again — a sharp reminder of geopolitical risk.

China is the primary, though unstated, strategic target of Indonesia’s new export controls, even if the policy is officially framed as domestic economic reform. While the government justifies it as an anti-corruption and revenue-collection measure, its design and timing suggest a desire to reduce China’s dominant hold over Indonesia’s most valuable resources. This move appears to be part of a larger geoeconomic strategy to rebalance Indonesia’s relationship with Beijing and possibly please Washington.

China is Indonesia’s largest trading partner and the biggest importer of its coal, palm oil, and nickel. More critically, Chinese companies control approximately 75% of Indonesia’s nickel refining capacity and dominate the processing of other commodities. This new export SOE gives the Indonesian government leverage over sales and pricing of products currently controlled by Chinese firms.

For the full year 2025, China imported about 41.4% of Indonesia’s total 505 million tonnes of coal, 18.5% of its 32 million tonnes of palm oil, and virtually 100% of its US$15 billion ferroalloy exports.

The announcement came just days after the China Chamber of Commerce in Indonesia sent a five-page protest letter to the government, mentioning Indonesian authorities of "excessively stringent regulation, over-enforcement, and even corruption and extortion" specifically targeting Chinese enterprises. The swift signing of the regulation is widely seen as a direct rejection of that complaint.

This "hostile takeover" of industries heavily financed by China aligns with latent anti-Chinese sentiment among some Indonesians and echoes US policies in Panama, Venezuela, and now Iran. The strategy appears to force a renegotiation of massive, China-dominated industrial parks like Morowali and Weda Bay. The scale of Chinese investment and import volume means the impact is disproportionately felt by Beijing. Indonesia appears willing to risk friction with China, even knowing that China harbours long memories.

Is Indonesia Alone in Such Policies?

While Indonesia’s new single-desk monopoly on palm oil, coal, and minerals is a bold move, it is not isolated. Egypt presents a close parallel with its rice export controls. The US, under the guise of national security, has aggressively restricted advanced technology exports to China. Beijing has retaliated by adding US and EU entities to its export control list.

According to the OECD, the number of export restrictions on critical raw materials has surged fivefold since 2009. State controls now affect a massive share of global exports for key minerals, including 70% of cobalt and manganese, 47% of graphite, and 45% of rare earth elements. For both China and the US, export controls are a primary tool of geopolitical leverage. In Indonesia’s case, however, the government has long forced foreign companies to build local processing plants in the name of resource nationalism — seeking to climb the value chain rather than just exporting raw materials. China gladly complied, thinking it a win-win, only to feel sidelined once everything was in place.

Is the New Export Policy Causing the Rupiah to Plunge?
The Indonesian rupiah fell to 17,720 per US dollar on May 26, making it one of Asia’s worst-performing currencies this year. The main stock index tumbled 3.46% the same day, deepening a rout partly triggered by the removal of several Indonesian companies from major global indices.

Officials moved quickly to reassure markets. Speaking to villagers in East Java, President Prabowo remarked, "Villagers don't use dollars. The ones who are having a headache are those who like to travel abroad." Such dismissiveness is typical of political leaders but often a prelude to more serious problems. Villagers may not use dollars directly, but many goods they consume are affected by exchange rates. Tempeh, for example, is made from soybeans, which Indonesia imports (about 2.4 million tonnes annually) and pays for in US dollars. The same applies to wheat and garlic.

Is Indonesia heading toward a repeat of the 1997 Asian financial crisis?

Total debt owed by Indonesians to online lenders reached 103 trillion rupiah (US$5.8 billion) as of March, reflecting that many households have exhausted savings trying to keep up with inflation. The manufacturing sector is also under pressure: roughly 90% of total imports consist of capital goods and raw materials. Industries will inevitably pass higher foreign-exchange costs on to consumers.

The Finance Ministry has stated it will help Bank Indonesia stabilize the rupiah through bond market interventions and curb foreign outflows, targeting daily injections of more than US$113 million to generate positive sentiment. The minister also stressed that Indonesia has multiple funding sources and that the issue is one of cash management. But this may be bravado. The rupiah is likely to come under further pressure. When investors lose confidence in a government’s credibility, they simply move capital elsewhere.

While the rupiah’s decline is not solely due to the new export policy, the policy is a major contributing factor. The situation combines global pressures with self-inflicted domestic uncertainty. The new policy has created market uncertainty, with foreign investors worried about its complexity and potential for creating an inefficient, costly monopoly. The surprise announcement has led to a sell-off in Indonesian stocks and bonds, with foreign investors recording a net sell-off of IDR 41.28 trillion since the start of the year. By keeping a lid on fuel price inflation to protect household purchasing power, the government has shifted much of the economic pressure onto the currency, making the rupiah’s weakness appear more pronounced.

Conclusion
China should beware: this trend may continue. We have already seen the seizure of two ports in Panama, Australia’s decision to exclude China from the Darwin port, and BYD’s experience with the Malaysian government — changing conditions after factory construction began. Similar two-faced dynamics exist with South Korea, Vietnam, the Philippines, Pakistan, Mexico, Argentina, Chile, and even eager small states in Polynesia.

Rather than only threatening retaliation, China might consider measured responses. Only credible consequences may convince these "banana governments" that China is not a paper tiger.  

Going forward, China should avoid pouring billions into solo ventures and instead seek strong local partners to mitigate risk.

End

PS: Indonesia appears to have backed down on some aspects by delaying or clarifying certain policies of the new policy in respect of Nicke – raw nickel ore is not among the commodities that must immediately go through DSI. The government has agreed to postpone planned increases on mining royalties and mineral export taxes. Despite the concessions, the strategic direction is clear: the government intends to tighten its control over the nickel sector and other critical minerals.