Indonesia’s Resource Nationalism Is Testing Its Relationship with China

Chinese investors in Indonesia’s nickel industry recently sent a formal protest letter to President Prabowo Subianto. The message reflects their concerns over Indonesia’s political and economic direction. The long-term trajectory of Chinese investment and Indonesia’s industrialisation programme will significantly hinge on how Indonesia resolves these concerns.

The letter, submitted by the China Chamber of Commerce in Indonesia (CCCI), complained about a series of government policies, including proposed royalty hikes, stricter foreign exchange retention rules, sharp reductions in nickel mining quotas, and what investors described as increasingly indiscriminate law enforcement. Collectively, Chinese firms argued, these measures have significantly increased operational costs and undermined investment certainty in Indonesia’s nickel downstream sectors.

The nickel industry has arguably become the economic backbone of modern Indonesia-China relations. Over the past decade, Chinese firms have invested over US$65 billion into smelters, industrial parks, and EV battery material processing facilities, particularly in Sulawesi and North Maluku. Indonesia’s downstreaming industrial strategy, through a raw ore export ban and domestic processing mandate, succeeded primarily because Chinese capital and technology were willing to take the risks associated with such industrial policy. Indonesian regulatory coercion through the export bans, combined with the availability of cheap coal-based energy and weak environmental enforcement, contributed to the conducive conditions for Chinese capital expansion. Therefore, Indonesia’s rise as the world’s dominant nickel producer is also a story of China’s industrial and financial footprint in Southeast Asia.

The recent tensions reveal the limits of that partnership. The Prabowo government wants to extract greater returns from its mineral wealth. At the same time, Indonesia still depends heavily on Chinese capital to sustain its industrialisation. Since taking office, Prabowo’s administration has been pursuing an increasingly nationalist economic agenda centred on downstreaming and priority sectors, e.g., food, energy, and defence. All these ambitions require money. The policy for increasing mining royalties and tighter control over export revenues reflects Jakarta’s effort to capture a larger share of resource rents amid growing fiscal pressure. Interestingly, instead of addressing the concern, Jakarta further tightened its resource policy. After Prabowo’s speech at a plenary session at the People’s Consultative Assembly on 20 May 2026, the government issued a regulation governing the export of natural resource commodities and established Danantara Sumberdaya Indonesia (DSI), a new state-owned enterprise with a special mandate to manage and oversee transactions involving strategic natural resource exports, including nickel products such as ferroalloys.  

From Jakarta’s perspective, the nickel industry is a strategic national asset for Indonesia’s ambitions in EV supply chains and industrial upgrading. Nonetheless, the administration has determined that the dependency risk due to Chinese firms’ growing influence in the sector warrants stronger state control.

Nevertheless, Indonesia still needs Chinese investment far more than it publicly admits. Chinese firms are deeply embedded across the nickel value chain, from mining operations to refining and precursor manufacturing for battery production. Many projects involve significant sunk costs and long-term infrastructure commitments. Jakarta cannot easily replace Chinese investment with Western, Japanese, or South Korean alternatives in the short term, especially as global nickel prices remain weak and financing conditions tighten.

For years, both governments have described their economic partnership as mutually beneficial and strategically aligned. The Chinese investors are challenging this narrative by exposing growing unease beneath the surface.

Given this situation, Indonesia’s response to the Chinese investors’ complaint has been cautious. Energy Minister Bahlil Lahadalia said that the government remained open to dialogue with investors. Following consultations with Finance Minister Purbaya Yudhi Sadewa, the government agreed to temporarily postpone planned royalty increases while seeking a “more balanced” formula.

The temporary postponement suggests that Jakarta understands the risks of its tougher policy on Chinese companies. But Prabowo is unlikely to abandon his resource nationalist agenda as he believes these revenues will be crucial for supporting his populist projects and maintaining political economic sovereignty. More importantly, the Prabowo government believes it now has greater leverage in global nickel supply chains.

The key question, then, is whether the fallout from the CCCI’s letter will ultimately reduce Chinese investment in Indonesia’s nickel sector. Drastic change is unlikely, but the horizons have darkened. Chinese investors are too deeply entrenched to exit quickly. Most major nickel projects involve long investment horizons, integrated supply chains, and substantial fixed infrastructure. Moreover, Indonesia remains one of the few jurisdictions globally offering large-scale nickel reserves combined with strong government support for downstream processing.

That said, Chinese firms may adjust expansion plans, and possibly postpone new smelter construction, reduce reinvestment, or demand higher returns to compensate for higher political risk. Investors may look for projects with stronger certainty or clearer regulatory guarantees.

Equally important is the impact on broader Indonesia-China relations. For years, both governments have described their economic partnership as mutually beneficial and strategically aligned. The Chinese investors are challenging this narrative by exposing growing unease beneath the surface. Notably, the CCCI wrote directly to Prabowo instead of using the usual closed-door, bureaucratic channels, and it has not responded to the letter leaking to the general public. This suggests that Chinese investors increasingly doubt whether ministerial-level institutions can provide predictable policy coordination — and they are quite comfortable with their grievances being widely known.

Under the Prabowo administration, political and economic power has become more centralised, but the rampant corruption in the Indonesian bureaucracy and lack of coordination between ministries and other state agencies do not inspire confidence that the government can recalibrate its regulation of the nickel industry.

This development represents a serious test for the future of Chinese investment in Indonesia, and for Indonesia-China economic relations under Prabowo. Both sides still need each other, but their interests are increasingly misaligned. Jakarta has so far reacted by backtracking on some of its aggressive interventions, but its policy response may be unsatisfactory for Chinese investors seeking policy stability and commercial predictability.

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