Amid escalating tensions and changing political environment in Asia, Nepal’s Prime Minister Pushpa Kamal Dahal, popularly known as Prachanda, is scheduled to visit China on September 23. This will be his second foreign trip after assuming charge as the country’s prime minister in December 2022.
Unlike 2008, when Prachanda chose Beijing as his first foreign capital as the country’s prime minister, in 2016 and 2023, he maintained the tradition of visiting India first.
Geopolitical and geoeconomic considerations guide Chinese ties with Nepal. In 2019, during Chinese President Xi Jinping’s visit to Kathmandu, the two countries elevated their relationship to a ‘strategic partnership of cooperation’, featuring ever-lasting friendship for development and prosperity. On the economic front, China is Nepal’s largest source of foreign direct investment and its second largest trading partner, after India. In 2022, Nepal’s imports from China were $1.84 billion, while exports totalled $5.39 million.
Loans not grants: a fear of falling into the ‘Chinese debt trap’
One of the major irritants between Beijing and Kathmandu is the projects under the Belt and Road Initiatives (BRI). In 2018, Kathmandu proposed a list of 35 projects in areas such as infrastructure, energy and power, north-south corridor upgradation, free trade areas and construction of integrated check posts at various Nepal-China border points under the BRI. Through such projects, Nepal aimed to bring an investment of around $10 billion.
However, China did not agree on the proposed number of projects, which were finally trimmed to nine.
In May 2022, then Chinese Ambassador to Nepal, Hou Yanqi, claimed that the three international airports – Gautam Buddha Airport in Lumbini, Pokhara Airport, and Tribhuvan International Airport – in Nepal are within the framework of the BRI. However, in June 2023, Nepal’s foreign minister N.P. Saud said that not even a single project under the BRI had been executed in the country.
There is a lack of clarity on the funding of the projects under the BRI, which has a loan component and not grants.
Nepal’s strategic significance for the US
A study titled Banking on the Belt and Road: Insights from a new global dataset of 13,427 Chinese development projects by Ammar A. Malik et al. for AidData shows that the average interest rate of a loan from an official sector in China is 4.2%, while the average maturity length is 9.4 years and the average grace period is 1.8 years. This is much higher than the soft loans from World Bank and the Asian Development Bank, which have a maximum interest rate of 1.3% and a longer repayment period.
Such a difference in the interest rates create fear among many small countries of falling into “China’s debt trap”; however, China’s third white paper on foreign aid, China’s International Development Cooperation in the New Era, published in 2021, talks about increasing aid to developing countries within the BRI framework.
A power contest has reignited in Asia, with Nepal acquiring strategic significance for Washington D.C. Like BRI, Nepal agreed on the Millennium Challenge Corporation (MCC) in September 2017 and ratified it on February 27, 2022, with 12 interpretative declarations.
Under the agreement, MCC, an independent aid agency of the US, will bear the cost of $500 million and Nepal will provide $130 million for various projects. Post-MCC, some important US officials, such as Under Secretary of State for Political Affairs, Victoria Nuland, and Assistant Secretary for South and Central Asia, Donald Lu, visited Kathmandu.
The role of India
More than China and the US, India is an important country for Nepal.
In 2022-23, India’s exports to Nepal were around $8 billion, while its imports were $840 million. India has provided a transit facility to landlocked Nepal to carry out trade with a third country. To enhance their bilateral ties, during Prachanda’s visit to New Delhi in May-June this year, the two countries kept political disputes and differences over territory aside and inked important memorandums of understanding /agreements and launched important projects.
Their ties had deteriorated after India carried out an economic blockade that lasted for about four and a half months in 2015-16. Due to this, Nepal had suffered a loss of about $1.96 billion. Then there was a row over India’s updated map released in 2019, showing Kalapani its territory. Nevertheless, India and Nepal share close relations.
Beijing has often publicly reacted over Nepal’s growing ties with the US and its deep relations with India. For instance, after Nepal ratified the MCC, Chinese foreign ministry spokeswoman Hua Chunying called it a Pandora’s box and said that China believes that international development cooperation should be based on the principle of mutual respect, equality, and that the sovereignty of the country should be respected.
Commenting on India, while addressing the audience in a discussion titled ‘China in global economy and its impact in Nepal’, held by the Foundation for Trans-Himalayan Research and Studies and Friends of Silk Road Club Nepal at Kathmandu, Chinese ambassador to Nepal, Chen Song, ignited a controversy after saying, “Unfortunately, you have a neighbour like India, but fortunately you have a neighbour like India, because India is a huge market with a huge potential you can tap in to…But at the same time, India’s policy towards Nepal and other neighbours is not so friendly and not so beneficial to Nepal. So we call that a policy of constraints.”
There will likely be an emphasis on Nepal’s economic needs and China’s strategic investment during Prachanda’s visit to Beijing. Nepal needs execution of the projects planned under the BRI framework and may ask for more Chinese investment in various sectors for its economic growth.
On the other hand, the Chinese will mainly be interested in having a friendly government in Kathmandu which can appropriately address Beijing’s political, economic, and strategic interests in Nepal. Kathmandu has reiterated that it aims to have a balanced relation with India and China. However, it appears to be difficult to do that for a very long period.
Amit Ranjan is a research fellow at the Institute of South Asian Studies, National University of Singapore.
