Legal Perspectives on Chinese Investment in Indonesia’s Special Economic Zones

 By Kusnandar & Co.,  Attorneys At Law – Jakarta, Indonesia

 

The rapid development of Special Economic Zones (SEZs) in Indonesia in recent years cannot be separated from the strategic role played by Chinese investors, who have emerged as key partners in advancing value-added industrial growth. Their involvement—particularly in downstream processing, renewable energy, high-technology manufacturing, and advanced materials—has significantly strengthened Indonesia’s industrial supply chains and accelerated its broader economic transformation.

Notably, Chinese enterprises have contributed to several major SEZs across the country. In Galang Batang Special Economic Zone, investments have focused on alumina processing, photovoltaic industries, and chemical manufacturing. Meanwhile, Kendal Special Economic Zone has developed into a critical hub for electric vehicle battery supply chains, and Gresik Special Economic Zone hosts large-scale projects such as Southeast Asia’s largest copper foil plant and one of the world’s largest glass manufacturing facilities. These developments illustrate how foreign investment—particularly from China—has supported Indonesia’s ambition to move up the global value chain.

From a policy perspective, the presence of Chinese investors reflects a high level of confidence in Indonesia’s economic prospects and demonstrates an alignment of strategic vision between the two countries in building competitive, export-oriented industries. This collaboration has positioned Indonesia more prominently within global production networks, particularly in sectors linked to the green economy and advanced manufacturing.

However, from a legal standpoint, the increasing reliance on foreign investment within SEZs also necessitates careful regulatory oversight. Indonesia’s legal framework already provides a strong foundation to ensure that such investments remain lawful and aligned with national interests. Law Number 39 of 2009 on Special Economic Zones establishes the legal basis for SEZ development, offering fiscal and non-fiscal incentives while maintaining regulatory control. Within this framework, all investors—including Chinese entities—must operate through legally recognized business structures, typically Foreign Investment Companies (PT PMA), and comply with applicable licensing requirements.

In addition, the implementation of the risk-based licensing system under Government Regulation Number 5 of 2021 ensures that business activities within SEZs are subject to appropriate levels of scrutiny based on their risk profile. High-risk industries, such as heavy manufacturing and energy-related projects, are required to meet stringent environmental standards, including mandatory Environmental Impact Assessments (AMDAL), as stipulated under Law Number 32 of 2009 on Environmental Protection and Management.

Equally important are labor and technology transfer obligations. Indonesian labor law mandates the prioritization of local workers and regulates the employment of foreign personnel, ensuring that investments contribute not only to capital inflows but also to human capital development. Furthermore, sector-specific regulations—particularly in mining, energy, and downstream industries—impose requirements for domestic processing, thereby preventing purely extractive economic activities.

The recent establishment of D-Hub Special Economic Zone under Government Regulation Number 38 of 2024 represents a forward-looking expansion of the SEZ model. By integrating education, healthcare, digital economy, and creative industries, this new zone reflects Indonesia’s intention to diversify beyond resource-based sectors and foster innovation-driven growth. It also opens new avenues for foreign investors, including those from China, to participate in high-value, knowledge-based industries.

In conclusion, the involvement of Chinese investors in Indonesia’s SEZs is both legally permissible and economically beneficial, provided that all regulatory requirements are strictly observed. The existing legal framework is sufficiently robust to accommodate foreign investment while safeguarding national interests. Nevertheless, the key challenge lies in consistent enforcement and governance. Without effective oversight, there remains a risk of regulatory circumvention, environmental degradation, and unequal economic benefits.

Therefore, the Indonesian government must continue to balance its dual role as an investment facilitator and a sovereign regulator. Ensuring legal compliance, strengthening institutional capacity, and maintaining transparency will be essential to maximizing the long-term benefits of SEZ development and sustaining Indonesia’s trajectory toward an advanced and competitive economy.

By : K&Co. - May 5, 2026