Strategic Implications of Indonesia-China Ties Amid Domestic Unrest

The interplay between Indonesia’s domestic unrest and its deepening economic ties with China in 2025 presents a complex landscape for investors. Political instability, driven by austerity measures, institutional distrust, and controversial military reforms, has triggered a 5.68% annual depreciation of the rupiah and a 12.23% decline in foreign direct investment (FDI) [2]. These developments have forced Indonesia to recalibrate its foreign policy, with President Prabowo Subianto prioritizing closer economic partnerships with China while navigating U.S. trade pressures. For emerging market investors, understanding the geopolitical risks and sectoral opportunities is critical to positioning equities in this volatile environment.

Geopolitical Risks and Economic Fragility

Indonesia’s 2025 domestic unrest has exposed vulnerabilities in its economic governance and democratic institutions. Protests under hashtags like #IndonesiaGelap and #TolakRUUTNI highlighted public discontent over inequality and policy incoherence, leading to a 2.27% drop in the Jakarta Composite Index [1]. The government’s response—accelerating social welfare programs and stimulus spending—has raised concerns about fiscal sustainability, with public debt projected to reach 50% of GDP [1]. This instability has disrupted diplomatic engagements, including Prabowo’s cancellation of a planned China trip to address the domestic crisis [3].

Meanwhile, U.S.-China trade tensions have exacerbated Indonesia’s challenges. The U.S. imposed a 32% tariff on Indonesian exports, threatening key industries like textiles and footwear [4]. In response, Indonesia has deepened its economic reliance on China, with bilateral trade exceeding $188 billion in 2024, driven by Indonesian exports of nickel, coal, and palm oil and Chinese imports of machinery and electronics [1]. However, this dependency raises risks, including environmental degradation in nickel-processing hubs like Morowali and concerns over China’s influence in the South China Sea [1].

Sectoral Equity Opportunities and Risks

Chinese investments in Indonesia’s infrastructure and critical minerals have reshaped its equity landscape. Over $70 billion in state-led Chinese development finance and $94.1 billion in private FDI (2010–2024) have funded projects like the Jakarta–Bandung High-Speed Rail and Nusantara capital city [1]. While these projects promise long-term growth, they also carry risks: the rail project was delivered four years late and $1.2 billion over budget, underscoring execution challenges [1].

For investors, sectors like green energy and digital infrastructure offer resilience amid volatility. The Indonesian government’s push for renewable energy and digital transformation aligns with global trends, attracting capital to less politically sensitive industries [2]. Currency hedging strategies are also gaining traction as the rupiah’s volatility—reaching its lowest level since the 1998 financial crisis—complicates foreign investment [3].

Strategic Positioning for Investors

Emerging market equities in Indonesia require a nuanced approach. While the country’s strategic location and competitive labor costs position it as a potential hub in the U.S.-China trade war, investors must hedge against currency risks and policy uncertainty. Diversification into infrastructure and technology-driven sectors, coupled with regional portfolio balancing (e.g., shifting capital to Vietnam or Thailand), can mitigate exposure to Indonesia’s domestic instability [2].

Structural reforms in education and infrastructure will be pivotal for Indonesia to regain investor confidence. Prabowo’s administration has pledged to accelerate social programs and modernize state enterprises, but consistent policy implementation and institutional transparency remain untested [1]. For now, investors should monitor geopolitical developments, particularly China’s role in Indonesia’s critical mineral supply chains and the U.S. reshaping of global trade patterns under high-tariff policies [5].

Conclusion

Indonesia’s strategic pivot toward China amid domestic unrest underscores the delicate balance between economic opportunity and geopolitical risk. While Chinese investments offer infrastructure and industrial modernization, they also amplify vulnerabilities tied to over-reliance on a single partner. For investors, the path forward lies in sectoral diversification, currency hedging, and a long-term view of Indonesia’s structural reforms. As the U.S.-China trade war reshapes global supply chains, Indonesia’s ability to navigate these dynamics will determine its role as a regional economic leader—or a cautionary tale of mismanagement.

Source:
[1] Indonesia's Economic Diplomacy: Leaning on China and Bargaining with the U.S. [https://www.asiapacific.ca/publication/indonesias-economic-diplomacy-leaning-china-bargaining-us]
[2] Assessing the Impact of Political Unrest on Southeast Asian Markets: Indonesia’s Turmoil [https://www.ainvest.com/news/assessing-impact-political-unrest-southeast-asian-markets-indonesia-turmoil-2508/]
[3] Prabowo cancels China trip, Beijing issues security warning [https://www.scmp.com/news/china/diplomacy/article/3323800/indonesia-protests-prabowo-cancels-china-trip-beijing-issues-security-warning]
[4] Indonesia affirms neutrality in U.S.-China trade war [https://indonesiabusinesspost.com/4150/geopolitics/indonesia-affirms-neutrality-in-u-s-china-trade-war-chooses-diplomacy-path]
[5] In charts: 7 global shifts defining 2025 so far [https://www.weforum.org/stories/2025/08/inflection-points-7-global-shifts-defining-2025-so-far-in-charts/]