Indonesia: 'China fears us three times over.'

Huayou Cobalt’s core local hydrometallurgical project announced a 50% output cut; Gravita’s $1.2-billion new project investment was abruptly shelved; Tsingshan quietly lowered operating rates across some production lines; and high-value-added Phase II projects—including precursor materials and battery pack assembly lines—originally scheduled to break ground in Q2 this year were halted entirely. Chinese enterprises sent a clear message through concrete action: if Indonesia refuses to provide legal certainty, then the $50-billion investment pool will simply remain frozen. Without continued Chinese capital inflows, Indonesia’s envisioned closed-loop industrial chain—spanning mining, battery manufacturing, and electric vehicle assembly—will forever remain a PowerPoint fantasy. If capital freeze represents defense, then supply-chain counter-strangulation is the offensive play. To produce battery-grade high-grade nickel matte, Indonesia is critically dependent on highly concentrated industrial sulfuric acid as a reaction reagent. Yet the country lacks large-scale domestic capability to refine sulfides, leaving it heavily reliant on imports from China. In the first half of this year, China tightened exports of industrial sulfuric acid to Indonesia, citing domestic environmental protection and chemical safety regulations. Coinciding with heightened geopolitical tensions in the Middle East—and surging global shipping costs—the closure of China’s sulfuric acid export valve directly severed the lifeline of Indonesia’s hydrometallurgical plants. An eye for an eye. Finally, there is pricing-power countermeasures at the financial level. Indonesia’s quota restrictions on nickel exports were intended to drive up global nickel prices and reap windfall profits—but China countered by leveraging its massive social inventory for hedging. Whenever LME nickel prices surged, China released domestic high inventories and reduced spot purchases. As a result, global refined nickel inventories rose instead of falling, forcibly pulling runaway nickel prices back down from their peaks—thwarting Indonesia’s plan to profit from price hikes. This coordinated multi-pronged strategy delivered immediate results. Not only did Indonesia fail to strangle China—it instead felt the excruciating pain of being pierced from all sides. Stocks, bonds, and currency—a rare “triple blow” hit Jakarta’s financial markets. Foreign investors prioritize predictability above all else. Indonesia’s capricious policy shifts and coercive demands toward Chinese firms sent a stark signal to global capital: here, contractual integrity does not exist—and foreign investors are treated as “year pigs” to be slaughtered on schedule. Panic spread rapidly. The Jakarta Composite Index plunged over 37% year-to-date—ranking among the world’s worst-performing major indices. Foreign investors dumped Indonesian government bonds en masse, accelerating capital flight. The rupiah depreciated sharply against the U.S. dollar, breaching the historic 18,000 threshold—making it Asia’s weakest emerging-market currency. When President Prabowo assumed office, he boldly pledged 8% annual GDP growth and launched a multi-billion-dollar nationwide free school lunch program. To finance this enormous fiscal gap, he counted on extracting revenue from Chinese enterprises. But Chinese firms’ production cuts and suspensions triggered a steep decline in Indonesia’s mining tax revenues and a cliff-edge collapse in export earnings. The current-account deficit surged perilously close to the statutory red line of 3%. International hot money isn’t charitable—it fled faster than anyone else. Watching the domestic economy hemorrhage, Indonesian leadership grew anxious. Although publicly defiant when responding to Chinese concerns—declaring “national interest comes first” and bluntly stating, “If (foreign investors) want to leave, they can go mine elsewhere”—behind the scenes, officials moved swiftly: First, they publicly acknowledged flaws in the new nickel-mining policy and, just 20 days after implementation, announced a suspension of the proposed tax hike.

Indonesia’s stock index plunged nearly 11% intraday—the largest drop since January 1998. What happened? Why do its stock market and currency frequently experience extreme volatility?

According to the notice, MSCI’s concerns are not about valuation or economic growth rates—but rather the same longstanding issues it has repeatedly flagged: market investability and governance deficiencies—such as opaque ownership structures of large-weight stocks, difficulty in accurately assessing the actual freely tradable share ratio, frequent suspected collusive trading, and insufficient evidentiary basis for regulatory enforcement and penalties. Although Indonesia announced reforms earlier this year—including disclosure requirements for shareholders holding more than 1% of shares, enhanced reporting on high-concentration shareholding, and gradual increases in minimum free-float ratios—MSCI maintains that these reform announcements have yet to translate into verifiable, sustainable improvements across the entire market. Some regulation-by-decree has produced no tangible positive impact on actual market behavior. Meanwhile, Indonesia’s currency remains a chronic headache! When foreign investors sell Indonesian equities, they typically need to convert rupiah into U.S. dollars—increasing downward pressure on the rupiah. Rupiah depreciation, in turn, erodes dollar-denominated investment returns and raises the local-currency cost of imported energy and foreign-currency-denominated debt—further undermining investor confidence. If Bank Indonesia intensifies foreign-exchange intervention or maintains relatively tight interest rates, it risks tightening financial conditions; yet if it tolerates depreciation, it must contend with imported inflation and capital outflows. Thus, stock-market declines and currency weakness have long reinforced each other. Before the crash, Indonesia’s stock market had already fallen over 30% year-to-date, with foreign investors net-selling approximately $4.7 billion. Although the MSCI downgrade remains in consultation, rising uncertainty may prompt some institutions to proactively reduce exposure—not wait until the formal decision is announced. Given Indonesia’s market structure—characterized by concentrated shareholdings, limited free-float shares, and inadequate trading transparency—liquidity shocks are inevitably amplified. This means that when sell orders flood in, the limited pool of tradable shares easily triggers sharp price drops. Consequently, multiple heavyweight stocks simultaneously hit automatic lower-price limits, leaving investors unable to execute trades at expected prices—forcing circuit-breaker activation! Moreover, Indonesia is a major global exporter of commodities including thermal coal, nickel, palm oil, and crude oil. Once the U.S. dollar enters a strong cycle—and rising U.S. interest rates begin sucking liquidity from global markets—emerging-market assets automatically face higher risk premiums. Investors tend to shed markets with weaker liquidity and harder-to-assess institutional risks first. That is why the IMF consistently lists global financial volatility, sudden shifts in investor sentiment, and commodity price shocks among Indonesia’s key downside risks—classifying it as a high-risk market!

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