Indonesia looks askance at China's proffered hand. East Asia's two giants find it hard not to mix business and politics. Indonesia's bitter taste of communism has left it wary of China. But that hasn't stopped trade ties. And Peking hopes trade gains will bring a diplomatic windfall - Jakarta's recognition.

Like giant plates of the earth's crust, China and its southern neighbor, Indonesia, have been slowly creeping up on each other. For over two decades, no formal diplomatic ties have existed between the world's first and fifth most-populated nations, a rather unusual geopolitical estrangement given how most other countries have been wooing Peking. Indonesia severed relations in 1967, two years after an aborted coup that it blames, in part, on China.

But since early this year, a heated and lively debate has broken out in Jakarta, Indonesia's capital, on possibly restoring relations with Peking.

``We simply cannot ignore each other for too long,'' stated a Jakarta Post editorial in March.

To no small degree, the issue has arisen due to a fast-growing trade of goods. Both nations are in need of greater exports. And in Asia, business rarely knows political bounds.

``Trade can make relations easier for both of us,'' says Boedihardjo Sastrohadiwirjo, head of the China committee for Kadin, the Indonesian Chamber of Commerce and Industry.

Two-way trade has tripled since 1985, Mr. Boedihardjo says, although Indonesia alone keeps four sets of differing statistics. Kadin's figures, culled from its members, indicate Indonesia exported $340 million worth of goods to China last year, and imported $410 million (a deficit for Indonesia). The volume is relatively low, but the growth rate - more than 30 percent - reveals the potential.

Still, the Indonesian government of President Suharto appears a long way from normalizing ties. The trauma of the Oct. 1, 1965 coup attempt, and the bloody backlash in which hundreds of thousands of alleged communists and Chinese-Indonesians were killed, is still a factor in the country's policies. About 3 percent of Indonesia's 175 million people are ethnic Chinese.

That coup attempt, launched when the charismatic President Sukarno was in power, began with the murder of six anticommunist generals. It was led by Army dissidents who, according to the present government, were in league with the Peking-supported Communist Party of Indonesia (PKI). Under Sukarno, the PKI had become a major force in Indonesia and the third-largest communist party after the Chinese and Soviet parties.

The counterattack by anticommunist military forces brought General Suharto to power as president, dealing a major setback to the international communist movement. (Sukarno transferred key powers to Suharto in 1966, and retired from office a year later.)

``Opening relations with China is still an emotional, rather than a rational issue,'' says Mochtar Kusumaatmadja, Indonesia's foreign minister until March.

The coup bid ``left a scar in the heart'' of Suharto, Dr. Mochtar says. ``Many of those generals killed were his buddies.'' And, he adds, China's was the only embassy not to fly its flag at half-mast after the killings.

But in 1985, falling oil prices forced Indonesia to expand non-oil exports. A logical market for those sales was China. As part of the campaign to boost non-oil exports, the government allowed Kadin to sign a pact for direct trade relations with China's Council for the Promotion of International Trade, a semigovernment body. Until 1985, indirect trade existed, mainly through Hong Kong and Singapore. But, with British-run Hong Kong being turned over to Peking in 1997, Jakarta would have to face the issue of direct trade anyway.

Kadin's attempt to overcome small trade hindrances, such as statistics-keeping, customs clearing, and visa approvals, have proved useful for China to gain small ground in its hopes for Jakarta's diplomatic recognition.

``It's difficult not to mix business and politics,'' says R.A.M. Koesoemoadilogo, executive director of Kadin's China Committee.

China, for instance, has pushed for trade offices in Peking and Jakarta. In April, Suharto's state secretary said trade was still small enough not to justify opening such offices. China disagrees on Jakarta's figures, saying it has a trade deficit of $700 million with Indonesia.

China dangled an enticing carrot of even bigger trade before a Kadin trade mission to Peking in June. But whether Jakarta's business community will pressure its government for direct ties is unclear.

The military keeps close tabs on the new trade with China. Indonesian traders, mainly ethnic Chinese, must receive approval from the government intelligence agency, Bakin, which checks traders to see if they are blacklisted for past ties with the PKI.

``The big difference is that Indonesia businessmen are no longer afraid of trading with China,'' says Boedihardjo. ``I think President Suharto really wants this trading to do well.''

China uses the Romanian Embassy in Jakarta to represent its interests, and Indonesia uses the Netherlands' Embassy in Peking. Since 1985, the nations' foreign ministers have met on a regular basis. Some Indonesian diplomats say withholding diplomatic ties could prove a useful bargaining chip in the future.

As a developing superpower, China's military and economic strength in the 21st century could create new problems for Indonesia, which remains circumspect about Peking's long-term ambitions in the region.

Such concerns appeared confirmed in March, when the Chinese Navy forcibly took over six atolls occupied by Vietnam. The atolls are part of the Spratly Islands in the South China Sea, where there are overlapping claims by several nations. The violent takeover by China sent shockwaves through the region. The move was ``disquieting,'' says Mochtar, and a possible sign of a resurgence of historic Chinese hegemony.

If Indonesia ever lays aside its suspicions of China and opens relations, many regional analysts say it would mean Jakarta sees a convergence of security interests with Peking. Already, a tacit alliance exists between the two in opposing the Soviet-backed Vietnamese occupation of Cambodia. And China supports Indonesia's efforts for a regional nuclear-free zone.

Closer ties might come, analysts say, if Moscow greatly expands military operations from bases in Vietnam and US bases are closed in the Philippines. Also, Indonesia could use direct ties to gain China's support in international organizations as well as to diversify arms supplies to include cheaper Chinese-made weapons.

But this presumes China is no longer perceived as a long-term threat because of its demographic weight, geographic proximity, totalitarian ideology, and potential influence over kith and kin inside Indonesia.

The current debate on ties with China was ignited in February, when a former United States ambassador, Marshall Green, said on a visit that he found it difficult to understand Indonesia's attitude toward China.

Then, in a March speech, President Suharto failed to mention one of three conditions that Indonesia insists upon before it will recognize China: that Peking apologize for its alleged complicity in the 1965 coup attempt. China denies any involvement. And, despite Suharto's nonmention of the condition, security officials still say Peking should ``apologize first.''

The other two conditions are that China confirm it will never interfere in the internal affairs of other countries, especially Indonesia, and that China's Communist Party avoid helping Indonesia's ``remnants of communist elements.'' Exiled PKI members presumably living in Peking are believed by Jakarta officials to still be supported by China.

China claims it no longer supports, at least materially, insurgency movements in Southeast Asia, except the Khmer Rouge in Cambodia. And in April, China's deputy foreign minister, who was in Jakarta for a United Nations meeting, claimed that any Indonesian Chinese in China were prevented from conducting activities that may pose problems to normalizing ties.

One Western diplomat says the debate over the three conditions may be meaningless. ``Even if formal conditions are met, the pool of Chinese people in Indonesia may be too big to risk an opening of relations,'' he says.

Indeed, Defense Minister L. B. Murdani stated in early May that there will be no rush to unfreeze ties even if Indonesia is ``ideologically ready.''

Along with the debate on ties with China, the Indonesia military has revived the scare of a return of communism by underground members of the now-outlawed PKI. The fear centers on the possibility that communists have infiltrated the government to prepare for a post-Suharto period (perhaps in 1993).

Some skeptics contend the military's alarm is just a maneuver against encroaching civilian rule. Earlier this month, for instance, the first civilian was appointed to run Pertamina, the state oil company. Still, the government has launched an investigation of all former communists, who could number more than 100,000.