The Domino Effect: China’s Recent Stimulus and Its Impact on Indonesia

Key Takeaways:

1. China has announced potential stimulus measures that could include policies related to the property sector, monetary policies, support for the capital market, and social assistance.

2. The recovery of the property sector and consumption in China could benefit Indonesian producers of nickel, coal, and possibly palm oil, as well as consumer goods.

3. Liquidity in China's financial system may also encourage foreign direct investment (FDI) into Indonesia, which could strengthen our IDR and accelerate economic growth.

In late September 2024, China introduced a series of stimulus measures aimed to revive its slowing economy. These initiatives may include but are not limited to:

1. guiding banks to lower mortgage rates by 50 bps,

2. reducing down payment requirements for second homes from 25% to 15%,

3. buying back land sold but undeveloped and buying unsold housing inventory to be converted into affordable housing,

4. increasing the proportion of People Bank of China (PBOC) loans that local governments can use to buy unsold homes from 60% to 100%,

5. cutting the 7-day reverse repo interest rate by 20 bps, from 1.7% to 1.5%,

6. reducing the Reserve Requirement Ratio (RRR) by 50bps, which will inject approximately 1 trillion RMB ($140 billion) to encourage lending,

7. injecting RMB 800 Bn (USD 112 Bn) in liquidity to the stock market,

8. establishing a stock market stabilization fund,

9. special re-lending facility for stock buybacks,

10. cutting the Loan Prime Rate (recently done) and deposit rates by 25 bps, and the Medium-Term Lending Facility rate by 30 bps,

11. giving one-off cash handouts to households in need, and

12. giving monthly allowance of RMB 800 (USD 112) per additional child for families with more than one child.

(Bloomberg, DBS, Indo Premier, Maybank Securities, 2024)

The stimulus measures announced by the PBOC are expected to have several key outcomes for China’s domestic market:

• Make homeownership more affordable, encouraging more people to buy homes and boost spending.

• Allowing local governments to purchase unsold homes can stabilize the real estate sector, prevent further declines in property prices, and offer support to property developers.

• Enable banks to increase lending, leading to heightened investment across various industries.

• Help stabilize their stock market and improve investor sentiment.

China is Indonesia’s largest trading partner and its significant demand for Indonesian commodities such as coal and nickel offer a potential upside for Indonesia’s export-driven sectors if these measures were to be realized. The ripple effects from China’s economic revitalization could stimulate Indonesia’s commodity sector.

Figure 1: Indonesia’s Export Destination based on Value (USD Milllions)

Source: Badan Pusat Statistik (BPS), JUARA

These measures are particularly important for Indonesia, as China is its largest export destination, accounting for 25% of the country’s export value in 2023, according to BPS (Figure 1). We believe that the recovery in Chinese demand for key commodities, such as coal, nickel, and possibly crude palm oil (CPO) would lead to higher export volumes and an improved trade balance for Indonesia. Increased exports would not only boost revenue for Indonesian companies but also stimulate economic growth in key sectors such as mining.

Nickel is expected to benefit significantly from China’s stimulus measures, as it is a versatile metal used in various industries, including stainless steel production and electric vehicle (EV) batteries. Additionally, the initiative is likely to boost new housing sales, which could lead to an increase in China's household goods sales in 2025 (CGSI, 2024). This rise in household goods demand would, in turn, drive higher demand for nickel. Indonesian nickel producers are well-positioned to benefit.

Coal exports from Indonesia could also see a substantial rise. We believe that China’s stimulus measures, such as liquidity injections and lower interest rates, are designed to boost industrial production, which will increase the demand for energy sources like coal. As one of China’s energy suppliers, Indonesia could experience heightened demand for coal, leading to increased revenues directly from supplying larger quantities, as well as the possible rise in coal prices.

We also estimate that if China does provide cash handouts to families, their disposable income will increase, leading to higher spending like dining out. If this happens, the rise in dine-in consumption could benefit our CPO producers, either through increased demand or higher prices.

Companies with high exposure to Chinese markets, like those in the consumer goods sector, are also likely to benefit as rising Chinese consumption drives demand for their products. All these trends could lead to increased capital inflows, strengthening the Indonesian Rupiah (IDR).

The increased liquidity in China’s financial system could encourage greater FDI into Indonesia. China is already one of Indonesia’s key sources of FDI, contributing almost 15% of total FDI inflows (Figure 2). With more liquidity available for investment and consumption, Chinese investors may look to expand their activities in Indonesia, further strengthening our IDR.

Figure 2: FDI Value in Indonesia from Asian Countries (USD Mn)

Source: BPS, JUARA

In conclusion, China’s recent stimulus measures have the potential to significantly impact Indonesia’s economy. By boosting demand for key commodities such as coal, nickel and CPO, these policies could lead to higher export volumes and enhanced revenues for Indonesian companies. Additionally, the increased liquidity in China’s financial system may encourage further FDI in Indonesia, strengthening our IDR and bolstering the economy. As China works to achieve its growth targets, Indonesia stands to benefit from the recovery of its largest trading partner.

Reference List

Badan Pusat Statistik Indonesia (2024). Nilai Ekspor Menurut Negara Tujuan Utama (Nilai FOB: juta US$), 2000-2023 - Tabel Statistik. [online] Bps.go.id. Available at: https://www.bps.go.id/id/statistics-table/1/MTAxMCMx/nilai-ekspor-menurut-negara-tujuan-utama--nilai-fob--juta-us----2000-2023.html [Accessed 9 Oct. 2024].

Bloomberg.com. (2024). China Announces Cash Handouts for the Poor in Rare Use of Aid. [online] Available at: https://www.bloomberg.com/news/articles/2024-09-25/china-announces-cash-handouts-for-the-poor-in-rare-use-of-aid [Accessed 25 Sep. 2024].

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Juara Capital Indonesia, 29 October 2024