China's Soft Power v America's Smart Power'

Author: Carlyle A. Thayer, UNSW@ADFA

If China has made the running in Southeast Asia on the basis of soft power over the last decade, the tide now seems to be turning and the United States is re-engaging with smart power. The United States has signed the ASEAN Treaty of Amity and Cooperation; President Obama has attended the first ASEAN-United States leadership summit (and will host the second meeting in the US this year); Secretary Clinton has not only attended two ASEAN Regional Forum meetings in a row, but offered US good offices to help settle diplomatically one of the pressing security issues in Southeast Asia, the South China Sea dispute. In sum, Secretary Clinton has turned the multilateral table on China. The United States is back and engaged in Southeast Asia working with the support of regional states.

Continued Chinese bellicosity and diplomatic pique runs the risk of isolating China diplomatically and eroding the soft power gains of recent years. The timing is bad for China as the regional security architecture looks set to gain a new lease on life and expand into new areas of cooperation. The first ever meeting of the ASEAN defence ministers and their eight dialogue counterparts is set to take place in Hanoi on October 12. Later that month, the East Asia Summit (EAS) will convene with Secretary Clinton attending ‘in an appropriate capacity.’ This will set the stage for the United States to join this 16-member grouping, and for President Obama to attend the 2011 EAS meeting in Jakarta.
The emergence of the EAS will scuttle China’s preference for the exclusivist ASEAN+3 process (China, Japan and South Korea) that omits the United States.

For at least the past three years China has been increasingly assertive in advancing its sovereignty claims in the South China Sea. It succeeded in dividing ASEAN and isolating Vietnam. China has even threatened major American companies, such as ExxonMobile, that if they continue to work with Vietnam to develop its marine resources in the South China Sea their commercial interests in China would be threatened.

The Obama administration has directly confronted China and its bullying. China’s claim that the US orchestrated regional states to attack China verbally is disingenuous. It has been China in the conductor’s seat orchestrating the application of muscular diplomacy to divide ASEAN and undermine the network of US alliances and security ties.

US diplomatic initiatives must be placed in the larger context of US-South Korean naval exercises, the prominent surfacing of three Ohio-class submarines armed with conventional Tomahawk long-range cruise missiles in Subic Bay, Busan and Diego Garcia, and the visit of the nuclear carrier George Washington to waters off central Vietnam to mark the 15th anniversary of diplomatic relations. The view that US primacy is in decline seems premature indeed.

Secretary Clinton’s declaration that the South China Sea is a national interest counters China’s recent assertion that the South China Sea is a core interest.

The South China Sea is a vital artery for global maritime trade including the shipping of oil and LNG. For this reason it is unlikely that China will attempt any action that can be viewed as threatening the safety of navigation and transit through the South China Sea.

Since the Taiwan Straits crisis of 1995-96, China has sought to exert naval power in the first island chain in the western Pacific to keep the US Navy at bay. Thanks to North Korean belligerency, the US Navy has returned to exercise in waters adjacent to China, the fraying US-South Korea alliance has been repaired and the drift between Tokyo and Washington halted.

When developments in Northeast Asia and combined with Southeast Asia China’s bellicosity and diplomatic outrage appear to be a sign of weakness rather than strength.

Carlyle A. Thayer is a professor of politics at the University of New South Wales at the Australian Defence Force Academy in Canberra.

This article is an extract from an analysis provided to a leading defence journal.

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The US, ASEAN and China: Emergence of new alignment

August 28th, 2010
Author: Joel Rathus, Adelaide University and Meiji University

In November of last year, President Barack Obama pledged that he would be a ‘Pacific president.’ While the audience in Suntory Hall may have wondered about what exactly that statement meant, few in attendance doubted the sincerity or conviction of the president. As relationships between the US, ASEAN and China have been re-drawn, especially since the latest series of ASEAN-hosted diplomatic meetings in Hanoi, the meaning of a Pacific president is starting to become clearer. Three sites of change in particular warrant special mention; the East Asia Summit, the South China Sea and the Korean Peninsula. In all three cases, the United States and ASEAN states are becoming closer, while China is finding itself distanced from the decision-making process.

The early 21st century phenomena of China-ASEAN relations being closer than the US-ASEAN partnership appears to be reversing itself.
This realignment was first seen in the United States’ advancing its claim for a seat at the East Asian Summit.
On July 21, the US received an expression of general support from the foreign ministers after the Informal Consultation Meeting and Singapore’s Foreign Minister George Yeo later indicated that ASEAN had already decided to include the US in the EAS. That US Secretary of State Hilary Clinton is determined to return to Vietnam in October for the EAS and Obama’s intention is to attend next year’s EAS in Indonesia, This suggests that the US is confident that its accession is assured over the medium term. As a part of this process, ASEAN ministers also welcomed the decision to include the US in the first ASEAN Defence Minister’s Plus Eight Dialogue Partners scheduled for October.

Unsurprisingly, perhaps, the only player which failed to greet increased US involvement in the region warmly was China. China’s Foreign Minister Yang Jiechi was quoted as saying that China ‘took note with an open attitude’ of the ASEAN proposal for an expanded EAS and ‘look[ed] forward to consultations’ with ASEAN on the subject. But while China is dissatisfied with the direction the EAS is taking, this is a battle it already knows it has lost. As Wu Jianmin (a member of the Foreign Policy Advisory Group) observed last year, ‘We know that China could not stop the US if it really wants to join the EAS.’ Indeed, according to the declaration establishing the EAS, membership is determined by ASEAN alone – and while China is influential it simply cannot veto a proposal.

China has seen the US and ASEAN draw closer on issues of major interest, such as the territorial disputes in the South China Sea. Clinton’s identification of this issue as a ‘pivot’ of regional security brings the United States back as a player after more than a decade of diplomatic passivity (to China’s notable discomfort).

The emerging US-ASEAN-China realignment can also be seen in Clinton’s proposal on July 23 (together with 12 other Asian nations, including host Vietnam) for a dispute resolution mechanism over territorial issues to be established. Such a mechanism would build on (or over) the 2002 Declaration on the Conduct of Parties in the South China Sea signed by ASEAN and China. This Declaration can essentially be interpreted as a response to the 1992 Law on the Territorial Waters and Continuous Area and reflects an agreement to shelve the issue rather than resolve it – hence the lack of a dispute resolution mechanism. ASEAN efforts to move from ‘shelving’ to ‘resolving’ this issue have been systematically thwarted by China, and so it is unsurprising that China would again register dissatisfaction. China’s Foreign Minister Yang Jiechi noted, ‘turning the bilateral issue into an international or multilateral one would only worsen the situation and add difficulties to resolving the issue.’ Perhaps Yang meant to add ‘for China’?

Lastly, this realignment can be seen in US-South Korea relations and posturing in the ASEAN Regional Forum over the sinking of the South Korean corvette, the Cheonan. Again, China and the US found themselves in opposite corners on this issue, China reportedly working to remove references to the sinking as a North Korean attack. This disagreement over wording caused the adoption of the Chairman’s statement to be delayed a day. Korea’s growing frustration with China’s role in diplomatically supporting the North has, as in the case of ASEAN, caused South Korea to look to its traditional security provider, the US. The recent war games off the Korean peninsula, while clearly focused on the North, have caused concerns in Beijing. Notwithstanding the repositioning of the nuclear powered aircraft carrier the George Washington on the East side of the peninsula, the US and Korea are willing to disregard China’s warnings. Intriguingly, Japanese officers are keenly observing the joint US-Korean exercises.

A realignment is steadily underway in East Asia. Increasingly, ASEAN (and Korea) are moving closer to the geographically distant US, while China is becoming more distant from its neighbours.

Joel Rathus is a recent PhD graduate (Adelaide) and a former Monbusho Scholar (Meiji). He blogs at Eris in Asia.

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After Years of Inefficiency, Indonesia Emerges as an Economic Model

By AUBREY BELFORD, NY TIMES 05 AUGUST 2010

JAKARTA — After years of being known for inefficiency, corruption and instability, Indonesia is emerging from the global financial crisis with a surprising new reputation — economic golden child.

The country’s economy, the largest in Southeast Asia, grew at an annual rate of 6.2 percent in the second quarter of this year, data released Thursday showed. That is an acceleration from 2009, when gross domestic product expanded 4.5 percent.

The stock market hit a record high last week and has been among the best-performing equities markets in Asia this year, rising more than 20 percent since Jan. 1. The country’s currency, the rupiah, has appreciated nearly 5 percent this year against the dollar, among the strongest showings in Asia besides that of the yen.

Foreign direct investment, which was held in check for years after the 1997 economic crisis in Asia, is also returning. The country had 33.3 trillion rupiah, or $3.7 billion, in foreign direct investment in the second quarter of this year, a 51 percent rise from a year earlier, the Investment Coordinating Board in Indonesia said last week. The country is on track to attract more foreign investment this year than it did in 2008, when it lured in $14.87 billion.


Such statistics have some here cautiously saying that the country, a Muslim-majority democracy and one of the world’s most populous countries, could soon merit the kind of attention that investors now lavish on China and India.

“Indonesia is one of the most interesting, most attractive destinations in the world,” said Lanang Trihardian, an analyst at Syailendra Capital, a fund management firm based in Jakarta. “Foreign investors have been flowing to Indonesia from maybe around mid-2009. We are seeing a lot of liquidity coming into Indonesia, and it is mostly going to capital markets, to bonds, to stocks.”

Undoubtedly, significant obstacles to sustained growth remain. Despite progress on corruption, investors complain of confusing regulations and labor laws that make it difficult to dismiss employees. Little infrastructure has been built since the Asian economic crisis in 1997, and rolling blackouts have plagued the country for years.
While the education system has been successful in fulfilling basic requirements like literacy, the universities and colleges in the country are widely considered archaic.
But more than a decade after the chaotic overthrow of the Suharto dictatorship in 1998 — and subsequent fears of disintegration at the hands of separatist groups, as well as the threat of Islamic militancy — the country seems to have stabilized. It is rich in natural resources like palm oil, copper and timber, commodities that are in great demand in China.

The administration of President Susilo Bambang Yudhoyono has won plaudits for reducing debt and has achieved some success fighting graft. Mr. Yudhoyono was resoundingly re-elected to a second five-year term in 2009, and changes aimed at introducing more democracy have seen power devolved to local governments, where elections have been largely peaceful, orderly affairs.

In one sense, Indonesia appears more attractive these days because much of the rest of the global marketplace looks so gloomy. Its low debt, high growth and a sense of optimism compare favorably with a mood of despondency in developed markets like the United States, Japan and Europe.

The huge consumer market in the country, accounting for more than two-thirds of G.D.P., has largely been credited for maintaining growth. Although the global economic crisis crimped confidence, Indonesia’s relatively young population of 240 million and government stimulus policies, as well as a popular program of direct cash transfers to the poor, have kept consumption humming.

In Jakarta, worsening traffic and a proliferation of megamalls are seen as signs of the growing strength of the middle class. At the center of the capital, the huge Grand Indonesia mall opened in 2007 and expanded during the global downturn, adding theme areas with mockups of New York, Japan, the Arabian Peninsula and Paris, complete with a miniature, spinning Moulin Rouge windmill.

“We’re selling international brands here so Indonesians don’t have to shop abroad for them,” said Teges Prita Soraya, a spokeswoman for the mall, adding that trade, largely in imported luxury brands, had surged ahead despite the global crisis.

The mall is home to the country’s first branch of Harvey Nichols, the upscale British department store, and has boutiques for luxury brands like Chanel, Armani and Dolce & Gabbana — which already have branches in other malls across the city.

Yet there is criticism that economic growth has had less effect than it should have for the majority. About 15 percent of the population lives below the country’s official poverty line of around $1 a day, but advocates for the poor say the percentage would be larger if Indonesia set the bar a little higher, say, at $1.25. Relatively sluggish growth in labor-intensive industries has meant slow progress in curbing unemployment, which is over 7 percent.

The government believes that one solution to moving to a higher level of sustained growth is foreign investment, particularly in industries like manufacturing. The government’s investment coordinating board, known as BKPM, is hoping to attract $30 billion to $40 billion in annual foreign investment by 2015 — three to four times as much as it achieved last year, said Gita Wirjawan, head of the agency.

In an economy currently worth $650 billion a year and expected to grow to $1 trillion in five years, that is not terribly much. But it is “optically” very important for establishing Indonesia as a serious investment destination, he said.
“It’s not a slam-dunk, but it’s achievable,” he said.

Indonesia gets the largest share of its foreign investment from within the Association of Southeast Asian Nations, with non-Asean states like Japan and South Korea, as well as European countries, making up much of the rest.

Indonesia is working to change rules to make it easier to acquire land for infrastructure and is seeing interest in infrastructure investment, Mr. Wirjawan said.
The government recently eased investment rules in areas including health care, construction and electricity generation. At the same time, it is working to put the flow of “hot,” or speculative, money to better use, passing rules on government bonds requiring foreign investors to keep their money in the country for longer.

Such efforts seem to be paying off. The government announced this week that China’s sovereign fund, China Investment Corp., was hoping to invest $25 billion in infrastructure projects in Indonesia. Posco, the South Korean steel giant, signed a $6 billion deal on Wednesday to build a plant in Indonesia with the local producer Krakatau Steel.

While investment in manufacturing still lags behind other sectors, Mr. Wirjawan said that Indonesia, with its relatively low labor costs, was reaping the benefits of rising costs in regional competitors.

“We’re seeing an increasing relocation of factories by the Taiwanese, the Koreans and Japanese from Vietnam and China, given their rising labor costs and given the increased stability that people are seeing in Indonesia from an economic and political standpoint,” he said.

The Indonesian Footwear Association has said that major brands including Asics, Mizuno and New Balance have shifted part of their production to Indonesia this year because of rising costs elsewhere. Indonesia’s footwear industry employs 640,000 people and exported $1.8 billion worth of goods in 2009, said the association’s chairman, Eddy Widjanarko. Producers are hoping to increase that figure to $2 billion this year.

Katja Schreiber, a spokeswoman for Adidas — which has also been aggressively expanding production in Indonesia — said the country, its third-biggest supplier, offered “abundant labor availability, good quality, competitive prices and political stability.” Although production here is growing rapidly, she said, it is not happening at the expense of its top suppliers, China and Vietnam.

The local stock market has reflected the perceived strengths of the economy. Shares related to commodities, Indonesia’s main export sector, have been strong earners. Banking stocks have risen along with the generally upbeat mood on consumption and the relatively good health of the sector, which, for the most part, weathered the credit crisis reasonably well. Major consumer shares like Unilever Indonesia and the car distributor Astra International have been consistent leaders on the local index.

All this exuberance has raised some fears that inflation could become a big problem. The country’s central bank, Bank Indonesia, decided to hold its benchmark interest rate at 6.5 percent this week, despite a jump in annual inflation to 6.22 percent in July.
Regardless, many feel that Indonesia’s time has come again.

“In Asia there is a feeling that after you invest in China and after you invest in India, where are you going to invest? said Fauzi Ichsan, senior economist for Standard Chartered in Indonesia. “It’ll have to be Indonesia. It’s a natural destination.”

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Indonesia to keep shining

By Robert M Cutler/Asia Times /August 27,2010.
MONTREAL - Jakarta's principal stock market index has more than doubled since President Susilo Bambang Yudhoyono won the July 2009 presidential elections with a margin that made a run-off unnecessary.

Yudhoyono's comfortable victory came three months after his Democratic Party coalition won 314 of the 560 seats up for election to the People's Representative Council, the country's legislature. The stage was set for a period of political stability that has encouraged investment by local and overseas companies, including South Korean steel giant POSCO, and consumer spending.

The economy in the second quarter grew 6.2% compared with a year earlier and expanded at a rate 2.8% faster than in the previous three months, according to the country's Central Bureau of Statistics. Yudhoyono has set a 6.6% goal for annual economic growth, and the consensus is that this will probably reach at least 6.0%.

Exports, capital investment, and the consumer sector all contributed to the advance. Domestic consumption, though, was the main driver, accounting for over two-thirds of the country's growth, an atypically high figure for the region. Domestic automobile and motorcycle sales are a backbone of the consumer spending statistic, and gains there translate into Stock market strength - local automaker Astra International accounts for no less than 8% of the capitalization-weighted Jakarta Stock Exchange Composite Index (JCI).

The Indonesian stock market has been one of Asia's stand-outs, with the JCI powering up from 1,111 last October to 3,141 as of Wednesday's close. This growth is equivalent to a compounded rise of almost 4.84% per month consistently for nearly two years. The performance includes a recovery from 2,614 near the end of May to the present level, itself equivalent to a 1.42% compounded weekly increase over the last three months.
The JCI surpassed its previous (mid-January 2008) all-time high of 2,810 in early April this year, then fell back, passed it again in early June and has not looked back since. It has been showing short-term strength for the last two-and-a-half weeks, and this is continuing. That previous all-time high came from the basis of a level at 361 in mid-October 2002, itself a record of over five years of consistent growth of 3.37% compounded monthly.

The JCI has significantly outperformed the country’s other major market index, the LQ45, which is (as Bloomberg News explains) "a capitalization-weighted index of the 45 most heavily traded stocks on the Jakarta Stock Exchange", whereas the JCI is "a modified capitalization-weighted index of all stocks listed on the regular board of the Indonesia Stock Exchange". For example, over the past five years, the JCI has vaulted 216%, but the LQ45 is up "only" 174% during the same period.

Jakarta's stock market capitalization remains relatively small, given the size of the country. The market cap is only one-third of Taiwan's even though Indonesia's population is 10 times as large. At the same time, the country has well-established regional and global political links through membership of organizations such as the Association of Southeast Asian Nations and the Group of 20.

Like many Asian economies, Indonesia's is less financially intermediated by the international banking institutions that find themselves under continuing, if no longer immediate, threat. Its investment regulations are still seen as unfriendly in comparison with many Asian peers, and administrative steps have been under way for some time to improve the climate for foreign capital. Endemic red tape, corruption, and poor infrastructure complicate attempts to realize the potential of the country’s natural resource base.

HSBC economist Wellian Wiranto nevertheless remarked this month that "[F]oreign direct investment may be contributing more and more to growth, judging from the gathering interest among international companies seeing Indonesia as a big market with a large pool of labor force, right where the raw materials are", as quoted by India's Economic Times. POSCO, South Korea’s largest steelmaker, is only one of the latest to sign an agreement with an Indonesian firm for a new industrial plant (a steel mill in West Java with Krakatau Steel).

Relatively low interest rates are spurring consumption, although with annual inflation reaching a 15-month high of 6.22% in July, up from 5.05% a month earlier, those rates may be increased. Still, companies are plowing profits back into investment.

The only cause for worry would be the increasing unemployment rate, although even this has not worsened as much as feared. About half of the country's total employment remains in the agricultural sector, although it is not clear what proportion of those formally counted in agriculture may migrate seasonally to the cities. The high degree of informal-sector employment is a worry to economists and reformers, but it does provide a cushion of sorts.

At the same time, the country's export structure has the advantage of being more oriented toward Asian economies and therefore less dependent upon the vagaries of the Western consumer resilience. That does not make it immune from following global markets in the wake of periodic financial-crisis downturns, but these tend to be transitory waves of market emotion and not based on fundamental economic realities.

For these and other reasons, it is foreseeable that the Jakarta stock market will continue its stellar performance, other things being equal, even if it suffers the occasional inevitable hiccup. In the short term, for example, it is looking a bit overbought, even if volume has lately been impressive and a number of short-term technical indicators remain favorable. It is attempting to confirm its surmounting of a long-term ascending-tops trend line while it is at the same time at the top of a medium-term ascending-tops trend line.

Dr Robert M Cutler (http://www.robertcutler.org), educated at the Massachusetts Institute of Technology and The University of Michigan, has researched and taught at universities in the United States, Canada, France, Switzerland, and Russia. Now senior research fellow in the Institute of European, Russian and Eurasian Studies, Carleton University, Canada, he also consults privately in a variety of fields.

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Time for China to spend more

by Makmur Keliat, Jakarta | Sun, 08/22/2010 12:29 PM | Opinion The Jakarta Post

In some way, diplomacy could be analogous to someone who wants to travel from one place to another. In order to reach their destination at the right time and to make the journey comfortable, it is necessary to have a road map. This metaphor may be useful to get a broader picture of the diplomatic road that has been built by China in its relationship with Indonesia and ASEAN.

The first attempt to build a road from Beijing to Jakarta was made on April 13, 1950. But it was closed on Oct. 30, 1967 when the New Order regime decided not to continue its diplomatic relations with Beijing. That decision resulted in substantial change in the Sino-Indonesian relationship.

The two countries did not have official diplomatic relations for almost 23 years. The diplomatic road between Beijing and Jakarta was only rebuilt on Aug. 8, 1990. The Indonesian business community at that time had made strong efforts to encourage the Indonesian government to be closer to China. The interruption has shown us that the diplomatic road built by Beijing to reach Jakarta was not made overnight.
Three interesting developments can be identified now the diplomatic road between Beijing and Jakarta has entered the second phase, more than two decades on.
First, China has effectively utilized the road between Beijing and Jakarta to establish a number of intersections through which the country has become well connected and has wider access to other countries and diplomatic forums in Southeast Asia. China has been engaged in the ASEAN+1 and ASEAN+3 mechanisms and is also a member of the East Asia Summit.
It seems the diplomatic road to Jakarta has become an entry point for China to proliferate its diplomatic network and channels to the Southeast Asian region.
Second, China has succeeded in utilizing the Beijing to Jakarta diplomatic road to change attitudes with regard to the communist ideological threat of the 1960s era. Most people in Indonesia no longer see China as a poor country and the bastion of the communist ideological camp, despite the fact that China politically is still ruled by a communist regime. Thanks to media reports, China currently is seen more as a country with the largest reserve of foreign exchange in the world.
Third, China has primarily utilized the entire diplomatic intersection to cope with its large need for energy and natural resources and to speed up regional measures for trade and investment liberalization with ASEAN.
Let us take an example from the case of the ASEAN+1 mechanism. Under the umbrella of the ASEAN+1 mechanism, China in the year 1992 succeeded in persuading ASEAN to agree with the Framework Agreement on Comprehensive Economic Cooperation between ASEAN and the People’s Republic of China.

In fact, the idea of a ASEAN-China Free Trade Area (ACFTA) cannot be separated from, and is an integral part of, policy packages of the Framework Agreement. It is worth mentioning that the first stage of the ACFTA has been introduced without getting widespread public notice in Indonesia.
This can also be considered a diplomatic achievement of China. Formulated as an early harvest program, the target of the first stage has been the reduction of tariff rates for agricultural products to zero percent by the year 2006. That is why, since 2004, Indonesia has received a flood of various agricultural products from China.
In this regard, it would be too much to expect that Indonesia would be able to renegotiate the implementation the ACFTA. China is fully aware that Indonesia is in great need of funding resources from outside for the development of infrastructure.
By utilizing numerous diplomatic intersections it has built with the region, it is more likely that China will do its best to convince Jakarta that the more open the diplomatic road between Jakarta and Beijing, the larger the opportunity for Indonesia to get funding resources from China for building power plants, bridges and roads.
A more realistic option for Indonesia would be to persuade China to accelerate noneconomic cooperation, with the objective that it could be carried out as fast as implementation in the economic field.
The starting point to realize the option is through taking measures to concretize the general points of agreement embodied in the document of strategic partnership signed in 2005.
It is interesting to note the document has not been fully implemented, particularly items related to cooperation in the noneconomic field. China seems to have built a road for economic cooperation with Indonesia like building a highway, but cooperation in a number of other fields such as culture, education and defense seems to have appeared merely as a road map without any real journey being undertaken.
Therefore, the most challenging task that lies ahead in the Sino-Indonesian relationship in the years to come will be how to transform the document of strategic partnership into reality.
Jakarta should do its utmost to convince Beijing that if the focus of cooperation is directed solely on economic aspects, there will be little possibility for China to enlarge its constituency in Indonesia, which could be expected to lend support to the enhancement of Sino-Indonesian relations.
The constituency so far has mainly come from, and been limited to, the business community in this country. China should not repeat the bitter experience of Japan, which was regarded in Indonesia as an economic animal in the early 1970s.
In this regard, enlarging the scope for philanthropic activities, for instance through giving more scholarships to the academic community, might be useful to broaden the constituency. However, this is only possible if China accepts the idea that it is time for the country to spend more and earn less in its bilateral relationship with Indonesia.
The writer is chairperson of the Postgraduate Program, Department of International Relations, School of Social and Political Sciences, the University of Indonesia.

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