China and Indonesia have agreed to enhance economic cooperation during Chinese Premier Li Qiang’s visit to Jakarta. The agreements include a memorandum of understanding (MOU) between the central banks to facilitate bilateral transactions in local currencies.

The visit also resulted in an investment agreement between sovereign wealth fund China Investment Corporation and Danantara Indonesia, although specific details of the agreement were not disclosed.

Both nations committed to increasing collaboration in tourism and agricultural exports.

Li’s visit follows China’s recent initiatives to strengthen ties with Southeast Asia. This includes a 2+2 dialogue last month between the foreign and defense ministers of both countries.

Additional MOUs were signed covering economic, industrial, and supply chain development, as well as health and media sector cooperation.

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🔗 Source: Bloomberg

🧠 Food for thought

1️⃣ From suspension to strategic partnership: The remarkable transformation of China-Indonesia ties

The current economic agreements represent a significant evolution in bilateral relations that were completely severed for over two decades.

China and Indonesia’s diplomatic relations were established in 1950 but suspended from 1967 until 1990 following Indonesia’s violent anti-communist purges and subsequent regime change1.

This historical context makes the current partnership particularly significant. Bilateral trade has grown from just US$1.18 billion when relations resumed in 1990 to US$149.09 billion in 2022, representing a 19.8% year-on-year increase2.

The local currency agreement announced during Premier Li’s visit continues a pattern of deepening financial integration, with China now being Indonesia’s largest trading partner for 11 consecutive years3.

This shift illustrates how economic interests have overcome historical political tensions, with trade volume increasing nearly 130-fold over three decades.

2️⃣ Indonesia exemplifies ASEAN’s strategic balancing in US-China competition

President Prabowo’s administration is carefully navigating the increasingly complex regional dynamics to maximize economic benefits while preserving Indonesia’s sovereignty and options.

Indonesia’s approach aligns with the broader ASEAN strategy of maintaining productive relationships with both superpowers, accepting significant Chinese investment while avoiding exclusive alignment with Beijing4.

The US$10 billion in business deals from Prabowo’s previous visits to China5 alongside the new sovereign wealth fund agreement demonstrates Indonesia’s embrace of Chinese capital, particularly in strategic sectors like nickel processing and high-speed rail6.

This pragmatic approach has made Indonesia a significant recipient of Belt and Road Initiative investments in 2024, securing about US$9.3 billion while still maintaining diplomatic space to engage with Western partners7.

The relationship reflects what regional experts call “strategic diversification” rather than choosing sides, as Southeast Asian nations leverage their growing economic importance in the escalating US-China competition8.

3️⃣ Local currency agreement reflects broader regional economic autonomy push

The central bank MOU for bilateral transactions in local currencies represents a step toward reducing dollar dependency in regional trade.

This agreement builds on years of growing economic integration, with China-ASEAN trade reaching $797.63 billion in 2024, creating practical pressure to develop alternative payment mechanisms that bypass the US dollar9.

The timing is noteworthy as it comes amid intensifying trade tensions between China and the US, suggesting both countries are seeking to insulate their economic relationship from external pressures and potential sanctions risks2.

Similar arrangements are being pursued across the region as ASEAN countries work to enhance financial resilience and reduce transaction costs by using their own currencies for bilateral trade10.

The move aligns with Indonesia’s broader strategy of increasing economic self-reliance while deepening regional integration, particularly in sectors like renewable energy and sustainable development where cooperation with China has accelerated7.

……