JAKARTA, Aug 5, Reuter - Chinese Prime Minister Li Peng arrives in Indonesia on Monday to meet President Suharto and restore relations between the two countries kept apart by a quarter of a century of fear and mistrust.

But while the two men thaw the frosty silence of past decades, Indonesia's ethnic Chinese minority worries that better ties will aggravate their already difficult position.

"I don't want to have to say this, but anti-Chinese feelings in this country run very high ... that is why it has taken so long (to restore relations with China)," Defence Minister Benny Murdani told reporters at a recent economic forum.

Suharto's government froze relations with China in 1967, accusing it of backing Indonesia's Communist Party (PKI), at the time the third largest in the world, in a coup attempt.

Six generals died in the coup, and the anti-PKI bloodbath that followed left deep scars in the military.

"We have had to deal with the trauma haunting senior officials of the armed forces and intelligence. It is something emotional," former security chief Soemitro said in an interview.

But it is economic jealousy that has kept the wounds of the coup seeping anti-Chinese feeling for 25 years.

Less than three per cent of Indonesia's 180 million people are Chinese, yet they control four-fifths of the economy, economic analysts say.

Chinese involvement in Indonesian trade began among immigrants from China in Dutch colonial times.

"The world moved on and suddenly everyone found the new world was based on capital and it was the damned Chinese that controlled it," said Li Tak Cheng, an ethnic Chinese research specialist at the state-sponsored think-tank LIPI.

When Suharto came to power he inherited an economic shambles. "Suharto realised that to get the economy going he would have to give the Chinese their way," said Dahana, a lecturer in Chinese politics at the University of Indonesia.

Enormous ethnic-Chinese owned business groups sprang up and with them native Indonesians' resentment of their non-indigenous compatriots grew.

Li Peng will sign a trade agreement during his five-day visit and many Indonesians believe this will open the door for wealthy Chinese-Indonesians to remove their money from the local economy and invest in China.

"It's seen as a test of loyalty, are they faithful to China or Indonesia? There is no economic reason to switch to China, but perceptions are a hard thing to deal with," Dahana said.

"China is hungry and now it has a rice-bowl in the overseas Chinese (in Indonesia). That is how people feel," said Abdul Haris Nasution, armed forces commander at the time of the 1965 coup attempt.

If rich ethnic Chinese do appear to profit from the restored relations, the whole Chinese community in Indonesia may suffer.

"Any opposition looks for issues to replace those in power. If you agitate against the government it's fatal. If you agitate against the Chinese it's less fatal. It's a way to mobilise the masses," Li Tak Cheng said.

Ultimately, Suharto must continue to protect Indonesians of Chinese origin, one analyst said.

"After all, Chinese conglomerates produce the export earnings that pay off the country's foreign debt."