World Economy

Chinese, Japanese investors are looking here

What Indonesia can do to entice investors

Indonesia's courtship of foreign investors may get a fillip from Chinese and Japanese money seeking a fresh home.

"It's obviously in Indonesia's interest for there to be healthy and strong competition in their infrastructure pipeline," James Cameron, head of project and export finance for the Asia Pacific at HSBC, said earlier this month. "If you look at the size of the infrastructure need within Indonesia, there's going to be a lot of opportunity."

Read More Why Indonesia struggles to attract foreign investors

Over the past month, Indonesian President Joko Widodo traveled to Japan and China to woo fresh foreign investment, in a drive likely getting a boost from a ready supply of funds in both countries.

China, Japan to invest

Indonesia is set to benefit from China's drive to internationalize its currency, the yuan, said in a note last week.

"The warming up of Sino-Indonesian relationship, Indonesia's geopolitical significance and robust fundamentals are supportive," CIMB said. It noted two factors that are likely to boost flows: The Chinese Insurance Regulatory Commission's overseas investment rules now include Indonesia and the creation of the Asia Infrastructure Investment Bank (AIIB) -- with Indonesia as a prospective founding member.

A fisherman sits in his boat with the Green Bay Pluit residential and commercial project in North Jakarta, Indonesia in the background.
Dimas Ardian | Bloomberg | Getty Images

"The investment inflow could either through government bonds or infra projects," CIMB said.

Japanese funds are also targeting Indonesia, driven in large part by the Bank of Japan's massive monetary stimulus, HSBC said earlier this month. The central bank's purchases of Japanese government bonds (JGBs) is keeping yields low within the country as well as weighing on the yen, it said.

Indonesia already receives significant flows from Japan, with preliminary 2014 data from Japan External Trade Organization, or Jetro, showing $4.54 billion in foreign direct investment (FDI) into the country, or around 3.8 percent of Japan's total outbound FDI.

But HSBC expects a pickup, particularly in M&A flows, noting that Japan is already the third-largest outbound M&A market globally after the U.S. and the U.K., with companies often offering hefty premiums to ensure deals are secured.

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Earlier this year, Sumitomo Corp. boosted its stake in Indonesia's Bank Tabungan Pensiunan Nasional to 20 percent, paying around $470 million for an additional 17.5 percent stake of the lender.

Hurdles make for tough sell

To be sure, investing in Indonesia can be a tough sell. The country ranked 114 out of 189 in the World Bank's ranking of the ease of doing business this year, up just slightly from 117 last year, but still ranking below Zambia, Mongolia and Kazakhstan.

But the country's president has made reform a priority, introducing measures including setting up a "one-stop shop" for business approvals.

How Indonesia is progressing with reforms

"The first thing you need to do is show the situation is changed. You create a success story, then you gain the credibility," Chatib Basri, Indonesia's former finance minister, told CNBC this week on the sidelines of the World Economic Forum on East Asia in Jakarta.

One of the big drivers for change is that Indonesia's need for infrastructure financing is large -- around $500 billion, he noted.

"The government is only able to finance about 15 percent of it. We welcome every initiative related to infrastructure financing," Basri said.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter