Loans a 'motivation' for Megawati in China

China is the first leg of Megawati's Asian tour

BEIJING, China (CNN) -- Indonesian President Megawati Sukarnoputri's five-day visit to China is more than anything about trade and investment.

In the short term, Megawati wants to boost bilateral trade between Jakarta and Beijing and in the long term she is trying to increase Chinese investment prospects as well as to infuse investment confidence among Indonesia's own ethnic Chinese business community.

The $400 million in preferential loans President Jiang Zemin has promised to Indonesia is "a really important motivation" for the visit and far outweighs its diplomatic significance, says Zhang Xizhen, a Southeast Asia expert at Peking University's School of International Relations.

The economic deals include the two countries' largest oil concerns, Indonesia's Pertamina and China's PetroChina, which will enter a partnership.

The pact covers four areas of cooperation, including offshore exploration in Indonesian waters.

"I think if they cooperate well, Indonesia may become a main supplier of oil to China in the future," said Zhang.

Pertamina's president director Baihaki Hakim told Reuters last Saturday that the company was offering about 17 offshore or onshore blocks for tender and exploration this year, and the two companies might select some of those blocks for joint exploration.

Beijing's interest in securing oil supplies in the region would certainly be an important long term objective as China, a net importer, looks for new sources of energy to fuel its rapidly expanding economy and reduce dependence on Middle East supplies.

Weak economy

But there's a long way to go, and despite economic goodwill Indonesia is far from a prime market for Chinese investment.

There's Indonesia's own political turmoil and the fact that its economy never recovered from the 1997-98 Asian finance crisis.

"Even though both are big countries, economic ties aren't really that close. The Indonesian economy isn't developed in the first place, then the riots in 1998 had a big effect," Zhang told CNN.

He added another hoped-for benefit of the visit is boosting confidence among Indonesia's ethnic Chinese business community.

Indonesian-Chinese capital was withdrawn from the country's economy following anti Chinese riots that concurred with the fall of the then president Suharto. Much of the capital has remained offshore since then.

Indonesian exports of goods other than natural gas and oil reached $1.58 billion in 2001, a slight dip from the previous year. China was Indonesia's fifth largest export market for non-petroleum products last year.

Trade friction

Megawati watches military exercises in Java

Beijing is also hoping Indonesia's membership in a proposed free trade area with other ASEAN members will help stabilize friction already evident in the trade body.

Members like Malaysia and Vietnam complain Chinese goods are flooding their domestic industries, and Beijing may be trying to forestall the same conflict from arising with Indonesia.

"From China's point of view, there is a political agenda -- to get the ASEAN members to work more closely together," says Zhang.

While Indonesia and China may share some ambiguity in their support for a leading U.S. role in the war on terror, Megawati's hosts are expected to exercise an avoidance strategy when it comes to Indonesia's lukewarm response to U.S. calls to curtail Islamic radical groups operating in Indonesia.

"China's leaders won't be very open on their opinion of this issue, even though China's position is against terrorism and maintaining public support for the United States. Beijing cannot publicly support Megawati to crack down harder on Islamic radicals, nor can they support Indonesia's recent softening of commitment to crack down," says Zhang.

Dark history

Behind the diplomacy and smiles during the state visit the two countries share a sometimes dark past.

Ties were established in 1950 at a time when Jakarta embraced a non-aligned stance apart from both the then Soviet Union and United States influence.

Early on, both nations shared a distrust of the United States, although the U.S. was later to become clandestinely involved in supporting Indonesia's military against perceived communist threats.

In 1965 Indonesian-Chinese ties were suspended after Jakarta accused Beijing of backing a communist coup. Thousands of ethnic Chinese Indonesians were killed, on suspicion of being agents of Beijing.

Diplomatic ties were resumed in 1990, but were tested during anti-Chinese rioting in 1998 in the days leading to president Suharto's resignation.

Ethnic Chinese make up only some 5 percent of Indonesia's population, small by comparison with other Southeast Asian societies.

Anti Chinese sentiment is never far beneath the surface and frequently erupts in Indonesia during times of broader trouble and discontent.