China-Nepal Bilateral Economic Relationship: Win-Win or Master-Client?


Nepal s trade with China has been going through a rough patch since the outbreak of the Covid 19 outbreak. While the border remained closed, Nepal welcomed Chinese imports except on a few occasions when it was disrupted. Only last week of December 2022, Beijing allowed Nepal's exports to pass into China through the Kerung-Rasuwagadhi border after keeping it shut for two-way traffic for three years (The Kathmandu Post, 29 December 2022). But the Rasuwagadhi border point between Nepal and China had been closed again for around two weeks citing the Chinese New Year celebrations (Chinese New Year Celebrations started on 22 January and it will last till 2 February). Rasuwagadhi Customs Office chief Narayan Prasad Bhandari said that the Chinese side had closed the border saying they would open it on February 3 only (Online Khabar, 22 January 2023). As various Nepalese news reports say, since resumption of two-way trade, Nepal exported only 39 containers of goods in total, whereas China exported 14 containers of goods per day to Nepal. The huge gap in export data shows the selective interests of China towards its trading partners.  

According to the Department of Customs, imports from China in fiscal 2020-21 rose 28.58 per cent year-on-year to NR 233.92 billion. Before Covid in fiscal 2018-19, imports amounted to NR 205.51 billion. In 2017-18, the imports were valued at NR 159.98 billion, up from NR 129.87 billion in fiscal 2016-17. Nepal suffers a huge deficit in its trade with China. If Nepal imported NR 233.92 billion worth of goods from the northern neighbour in 2020-21, its exports across the Himalayas were valued at a mere NR 1 billion. This translates into a trade deficit of NR 232.90 billion, which accounted for 14 per cent of Nepal s total trade deficit in fiscal 2020-21 (The Kathmandu Post, 5 February 2022).

The exploitation of the trade deal and utilisation of trade routes favourable to Chinese benefits has led to a huge trade deficit for Nepal over the years, since China emerged as a large trading partner for Nepal after India. On the face of it, China says it is helping Nepal to realize its dreams. It has indeed emerged as a relatively formidable ally in trade and investment seeking to check India s preeminence in Nepal. It has also turned Nepal into a proxy battleground to fight out Indian influence.

The Sino-Nepalese bilateral relationship has grown over the years and the Chinese economic aid has played a crucial role in it. According to economic theory, foreign economic aid benefits the recipient. Does it work that way for Nepal with Chinese aid? As results show, it has led to growing influence of Beijing in the internal affairs of Nepal, which challenges its autonomy. As an economic giant of Asia, China uses its soft power or economic diplomacy (debt diplomacy) in all south and central Asian countries. In this context, Nepal is a good example of how China plays with its economic diplomacy. The country s political instability is homegrown, no doubt, but the China’s bid to start a geopolitical tussle with India has led to further instability in Nepal (Diplomat, 15 June 2021). 

Background of Sino- Nepalese Bilateral Relationship

The first bilateral agreement on economic aid was signed between China and Nepal in 1956. However, since 2008, China was seen to be making all out efforts to enhance its influence with Nepal, especially after Nepal became a federal democratic republic replacing the monarchical system. China-Nepal relationship has deepened after the Earthquake of 2015. That same year, India had imposed a de facto trade-embargo, leaving a landlocked and disaster-stricken Nepal scrambling for fuel and other essential supplies, which created an opportune moment for China to present itself as a benign and supportive neighbour. Although it was largely a symbolic gesture, given the bad state of the existing trade routes, China dispatched a dozen fuel tankers (South Asian Voice, 12 November 2020). As part of strengthening the relationship, China promised to allow Nepal access to six dedicated border transit points—Rasuwagadhi, Kodari, Yari, Kimathanka, Olangchungola and Nechung—and access to seaports in Tianjin, Shenzhen, Lianyungang and Zhanjiang and land ports in Lanzhou, Lhasa and Shigatse, which could help to balance landlocked Nepal s economic reliance on India (China Brief, 15 March 2021). In 2015, the Nepalese blamed trade disruptions that impacted food and energy supplies on an Indian blockade,” which later influenced the leadership s shift towards China (The Diplomat, 1 February 2017). Local analysts have also observed that, alongside the China-Pakistan Economic Corridor (CPEC), such investments could also aid in either increasing access to or circumventing India and undermining India’s traditional influence over Nepal (Kathmandu Post, 6 August 2020). 

The closer China-Nepal ties have also had benefits at the international level. For the past several years, Nepal has supported China s position on Xinjiang at the United Nations Human Rights Council (China Brief, 31 December 2019; The Diplomat, October 9, 2020). Nepal also supported Chinese position on the status of Hong Kong in 2019 (PRC Embassy in Nepal, 20 June 2020). 

New Delhi has reasons to get increasingly worried about China s creeping influence in Nepal. China has managed to project itself as a benefactor without much interest in the internal politics of Nepal and as an alternative to India, which is acting as a ‘Big Brother’. In fact, this negative perception about India is allegedly being fuelled by the Nepalese media at the behest of China.

Overview of Chinese Interest and Investment in Nepal

China overtook India as Nepal s largest FDI partner in 2014. In 2016, Nepal and China signed the Trade and Transit Agreement (TTA). Subsequently, Nepal became one of the first countries to join China s Belt and Road Initiative (BRI)—the latter s trillion-dollar-plus ambitious push to expand its global influence. At US$79.26 million, China accounted for nearly 60 per cent of foreign direct investment (FDI) commitments received by Nepal in the first half of the 2017. India was a distant second with US$ 36.63 million, followed by the US and Japan. According to a report by the research lab AidData, Chinese financial diplomacy” in various infrastructure projects in Nepal, including road and hydropower, has been about US$ 1 billion between 2000 and 2017 (South Asian Voice, 12 November 2020).
Since 2018, China and Nepal have been negotiating several railroads and transmission line projects. This indicates an increased level of financing over time, as Chinese investment in Nepal was much lower before 2015 (South Asian Voice, 12 November 2020). Chinese investors pledged more than $220 million worth of FDI to Nepal during the fiscal year 2019-2020, which more than doubled the previous year s figures ($116 million) even during the Covid-19 pandemic. Chinese FDI accounted for two-thirds of Nepal s total committed FDI during this period (China Daily, 9 September 2020).

In 2019, Xi Jinping paid a state visit to Nepal, first time a Chinese president visited the country in 23 years. During Xi s visit, the two countries elevated their relationship to strategic partnership,” creating the impetus to prepare work on projects such as a cross-border railway linking the Tibet Autonomous Region (TAR) with Kathmandu and a China-Nepal Friendship Industrial Park in Jhapa, eastern Nepal (China Daily, 24 December 2020). 

More generally, China s investment in Nepal falls into one of the two categories— state-owned or private. State-owned enterprises are largely involved in projects related to critical infrastructures such as hydropower and road construction. On the other hand, investments from private Chinese companies are mainly in micro-enterprises— small shops in major tourist destinations such as Thamel in Kathmandu and Pokhara. Nepal s tourism sector has also seen a boost with the influx of Chinese tourists. However, so far there have only been two big private investments— Hongshi Cement and Huaxin Cement. In 2017, China s Hongshi Group signed an FDI deal worth USD 359 million with the government and connected with Nepal s Shivam Cement to build a state-of-the-art cement plant in Nawalparasi in which the Chinese company owns a 70 per cent stake (South Asian Voice, 12 November 2020). 

In December 2019, China undertook an undercover action to get 122 Chinese nationals extradited from Kathmandu to Beijing. China is also playing, of late, the role of a mediator to resolve intra- and inter-party disputes which can be regarded as a deliberate attempt to intervene deeply in Nepal’s internal affairs. Whereas many in Nepal believe that the aid is bringing prosperity to the country, the Chinese financial aid is in fact more beneficial for China than for Nepal. It has proved immensely helpful for China to enhance its influence in Nepal and the region. Giving Nepal access to its dry and seaports is aimed at enticing landlocked countries like Nepal away from Indian influence.

However, the recent instance in the case of closure of Rasuwagadhi border trading point only indicates that Chinese policy of engagement is not aimed at enhancing the capacity of the Nepalese state and bringing prosperity to the Nepalese people; it is meant to perpetuate a master-client relationship where Nepal is sucked into the trap of China’s debt-diplomacy, loses its strategic autonomy and is reduced to a client state of China.

The relationship between India and Nepal, on the contrary, despite its asymmetries, is based on the win-win principle where Nepal retains its autonomy and financial independence.

Sumesh M.N. is a PhD Scholar in East China Normal University, Shanghai, China