But now China, East Asia’s strongest engine of growth, has declared that its economy is also experiencing a slowdown. China’s economy is predicted to grow at around 8 per cent this year, after growing at 10.4 per cent in 2010 and 9.2 per cent in 2011.

Weak demand from the EU, US and Japanese markets for Chinese products limited the contribution of net exports to growth. Meanwhile, investment spending also cooled as China curbed lending stimulus, which was introduced as a response to the global financial crisis.

But beyond this, the Chinese economy is undergoing an adjustment that can lower growth in the future. Meteoric growth of the Chinese economy in the last two decades is a result of China opening up its market, export-oriented policies and incentives for investment. But this approach also creates imbalances on many fronts, such as excessive current account surplus and income inequality. An internal adjustment is needed to bring about sustainable growth.

China will be less likely to rely on the accumulation of labour and investment for growth in the future because of its rapidly increasing wages and its brake on easy lending. Instead, China is likely to rely more on domestic consumption and redefine its comparative advantage on technology instead of depending on low wages and efficiency in production processes.

So, what does this mean for Indonesia? The gradual slowdown of the Chinese economy is likely to have an impact on East Asia — China contributes up to 80 per cent of GDP in developing East Asia. A slower growth in China will obviously reduce growth in the East Asian region.

Although China contributes less to Indonesian exports than that of other major countries in East Asia, its economic slowdown will have a direct impact on Indonesia. In 2011 China (including Hong Kong) contributed to 15 per cent of Indonesia’s non-oil and gas exports, and exports to China grew by an average of 28 per cent in the last five years.

China’s economic slowdown will also have an indirect impact on Indonesia through the prospect of lower demand and prices of raw materials. Coal, nickel, rubber and crude palm oil made up about half of the Chinese imports from Indonesia in 2011. Given China’s significant role in global demand of raw commodities, weakening Chinese exports will translate to lower demand for raw commodities, which can then lower global commodity prices. This will certainly have a noticeable impact on Indonesia, as resource-based products — raw and manufactured — comprise of around three-quarters of the value of Indonesia’s non-oil and gas exports.

But in the long term, Indonesia should welcome the adjustments to China’s economy. China is currently the world’s second-largest economy with a burgeoning middle class larger than the entire population of the US, and the average per capita disposable income in urban areas is above US$3,000.

Trade opportunities with China should multiply despite the prospect of slower growth. The large and growing Chinese middle class provides potential markets, as Chinese consumers become more sophisticated and interested in product variety. Indonesia, which already has an FTA with China (under the ASEAN-China FTA), can strengthen cooperation and explore market opportunities from the growing consumerism in China by supplying specialty products ranging from speciality coffee to high end musical instruments.

The prospect of China moving up the value chain provides opportunities for countries to revisit its depressed comparative advantage in processing or to integrate further with regional global production network. Higher wages in China can help Indonesia regain a comparative advantage in labour-intensive sectors, providing that Indonesia has the right infrastructure, improved access to finance and a coherent regulatory framework.  Soon it will be costly for China to remain competitive in supplying labour-intensive products.

Indonesia can also tap into FDI that is diversifying and relocating from China. News about Foxconn, a multinational manufacturer of iPads and iPhones, planning to establish a production facility in Indonesia should be welcomed and facilitated. But policy makers should also look forward and streamline regulatory frameworks to allow the Indonesian technology cluster, which includes manufacturers, services, research facilities and higher education, to thrive from closer commercial cooperation with foreign counterparts. Otherwise Indonesia would remain an assembler of ‘high-tech’ products without necessarily adding more value added into the economy.

Tourism is another big-ticket item. Indonesia can tap into the appetite of the Chinese middle class to travel abroad. Indonesia is in a good position to double the number of Chinese tourists that are interested in cultural and eco-tourism.

So, Indonesia needs to embrace the short-term impact of China’s lower growth while gearing up to maximise the potential of China’s economic rebalancing.

Sjamsu Rahardja is a senior economist for the World Bank country office in Indonesia. Views expressed are personal and do no reflect official views of the World Bank group and its Board of Directors.