The new capital will cover about 56,180 hectares in East Kalimantan province on the Indonesian part of Borneo, which the country shares with Malaysia and Brunei.
The question of who owns the oil-rich Sabah state resurfaced with the recent deportation of its Filipino residents.
Malaysia's king appoints seasoned politician Muhyiddin Yassin as new PM but Mahathir Mohamad says he has support of 114 lawmakers for a comeback as prime minister for a third time.
Indonesia is regularly hit by slash-and-burn clearances of forests for farms and palm oil plantations. Many of the blazes smoulder deep underground in peatlands, where they can last for months.
Blazes have been raging on Sumatra and Borneo islands with Indonesia deploying water-bombing helicopters and thousands of security forces to tackle them. In recent days, fires sent toxic smog floating over Malaysia triggering a diplomatic row.
The 190-metre vessel, carrying nickel ore, was travelling from Halmahera island to Sulawesi island when it sent a distress call shortly before losing radio contact last week.
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