Instability in South Asia Spells Trouble for China

It’s been one hell of a month in South Asia. As discussed in separate articles later in this issue, Pakistan and Sri Lanka have both seen major protests, with a full-on change of government in Islamabad and Sri Lanka’s rulers teetering on the edge. Meanwhile, Nepal saw its own governing coalition collapse last year, and the foreign policy impact of that is starting to become clear.

The new developments in South Asia are reshaping the diplomatic landscape and China’s interests will inevitably be impacted by the domestic political debates.

Instability is never good for Beijing, particularly when it touches countries where China has major financial investments at stake. More broadly, the power tussles will impact the geopolitical competition underway in South Asia and beyond, as India, China, the United States, and others jostle for influence in the various regional capitals.

Nepal

China was riding high in Nepal five years ago. In 2017, China helped broker a long hoped-for unification between the two main communist parties, the Communist Party of Nepal - Unified Marxist Leninist (CPN-UML) and the CPN - Maoist Center. The resulting coalition swept to power with a whopping two-thirds majority in the 2017 general elections, bringing K.P. Oli of the CPN-UML to power as prime minister.

Oli was seen as a pro-China prime minister, particularly as anger in Nepal toward India was riding high in the wake of New Delhi’s perceived interference in Nepali politics and a flare-up in India-Nepal territorial disputes. Oli upped exchanges with China, including signing a trade and transit agreement that would reduce Nepal’s reliance on India for external trade.

But then in 2020, Oli’s government began to crack apart, as the CPN-UML and Maoists clashed over power sharing arrangements. China reportedly intervened to save the unified Nepal Communist Party that year, but couldn’t repeat the feat in 2021. Oli was toppled when the Maoists defected, joining with the largest opposition party, the Nepali Congress, to create a new government. Oli was out as prime minister; Sher Bahadur Deuba was in.

Since returning to the prime minister’s office in July 2021, Deuba has lived up to the Nepali Congress’ reputation for being more amenable to India. He also notably pushed parliamentary ratification of the Millennium Challenge Compact, a $500 million grant from the United States to Nepal. The MCC had become a fraught political issue, with the Maoists especially insisting that ratification would rope Nepal into Washington’s “anti-China” strategy for the Indo-Pacific. For its part, Beijing made sure to amplify its allies in Nepal as they denounced the U.S.

Then Deuba turned the tables by defending the MCC – and bringing his coalition partners, including the Maoists, along with him. In the end, none of the major political parties voted against the MCC’s ratification, leaving China looking a bit foolish after its state media had embraced some of the more bombastic warnings about the grant’s impact on Nepali sovereignty.

To be clear, it’s not accurate to say that Deuba’s government is “anti-China” or that Oli was “pro-China.” In fact, for all the talk of China’s courtship of Nepal, even under Oli there was less progress than meets the eye. Despite constant nudging from Beijing, Kathmandu has not approved a single Belt and Road project since signing on to the Chinese initiative back in 2017.

That said, it is notable that China’s first major foray into Nepali domestic politics ended so quickly. Beijing put serious effort into bringing the CPN-UML and the Maoists together and spent a lot of diplomatic energy trying to keep them unified – only for things to fall apart in the end. China, as a long-time champion of non-interference, may not have realized just how difficult it is to interfere effectively in another country’s domestic politics.

Sri Lanka

In Sri Lanka, meanwhile, an economic crisis galvanized protests demanding the ouster of the Rajapaksa family, which has a reputation for pro-China policies. Under previous President Mahinda Rajapaksa, Sri Lanka took out major loans from China for mega-projects like Hambantota port and Colombo Port City. Despite the billions of dollars now owed to China, neither project is turning a profit. Sri Lanka famously ceded control of Hambantota port to a Chinese company in return for cash to help with its debt crunch. Colombo Port City is still under construction after facing delays and lawsuits.

Now Sri Lanka’s debt woes have sparked a balance of payments crisis, as Colombo no longer has the foreign currency to finance purchases of sufficient oil and gas, much less pay back its debts. Fairly or not, Chinese loans have become a potent symbol of Sri Lanka’s financial mismanagement. In actuality, as Umesh Moramudali has explained in several articles for The Diplomat, most of Sri Lanka’s debt is in form of international sovereign bonds, not Chinese loans, but the perception of China bearing responsibility for the current crisis continues to dog Beijing. As protesters seek to oust the Rajapaksas, accusing them of financial mismanagement and corruption, their demands come unavoidably tinged with suspicion of Colombo’s dealings with China.

Once again, though, it’s too simplistic to paint the Rajapaksas as “pro-China” or “anti-China.” For example, upon the family’s return to power in 2019 under President Gotabaya Rajapaksa – Mahinda’s brother – they didn’t fully resurrect their previous approach to China. Instead, the Rajapaksas made a point of turning to India as much as Beijing for support, including during the ongoing financial crisis. Sri Lanka inked a deal with India to develop the Trincomalee oil terminal – long a dream project for New Delhi – earlier this year. Meanwhile, relations with China have hit high-profile snags, in the form of canceled energy projects and a spat over contaminated fertilizer imports.

But in the realm of politics, perceptions may be even more important than reality, and there’s an undeniable perception in Sri Lanka that the Rajapaksa regime cut corrupt deals with China, to the detriment of the nation. No matter how the current protest movement ends, that narrative will resonate in Sri Lankan politics for the long term, limiting the ability of the Rajapaksas (if they remain in power) or a potential successor to craft close ties with Beijing.

Pakistan

Pakistan’s recent change of government poses a different kind of challenge for China. The new government, under Shehbaz Sharif of the Pakistan Muslim League - Nawaz (PML-N), is unlikely to significantly change Pakistan’s close ties with Beijing. The China-Pakistan Economic Corridor (CPEC), after all, was originally inaugurated under a PML-N government. Talk of China and Pakistan as “iron brothers” has remained consistent through Pakistan’s many changes of government.

China’s concerns after the change of government are more general. Clearly Pakistan’s chronic political instability – no civilian prime minister has ever completed a full term in office – remains very much a problem. While support for Chinese investments and interests has been the one constant, political instability brings economic consequences as well. Pakistan still hasn’t finished the reform program from its last IMF bailout, for instance, and never finished the previous one either due to abrupt government turnover.

Meanwhile, Pakistan’s opposition parties are apt to turn to purposefully disruptive tactics like sit-ins in major business districts and highways to press for political change. And that’s not to mention growing concerns about a resurgence in terrorism in Pakistan, with bloody attacks by the Islamic State and Pakistani Taliban becoming more frequent in the past two years.

China made a huge investment in Pakistan with CPEC – literally (to the tune of $62 billion) and metaphorically. CPEC is the “crown jewel” of the BRI, which means the reputation of China’s signature foreign policy framework is now riding on Pakistan’s economic stability. Imran Khan’s ouster, and his pledge to agitate his way back into office, make that look like a risky bet.

China in South Asia: Down But Not Out

Of course, the above developments do not mean that China’s South Asia policy is permanently damaged. Beijing’s main rivals in the region, India and the United States, have also seen their geopolitical gambits fluctuate or falter due to domestic politics abroad (with the Taliban takeover of Afghanistan as the most dramatic example). Plus, no country in the region is likely to take up a directly hostile position toward China, no matter the outcome of the various political crises at play. Any shifts will be a matter of degree.

If we should take anything from the political turmoil in South Asia, it’s this: There are no permanent “winners” or “losers,” whether in domestic politics or geopolitical influence. The party on the outs today (along with its preferred foreign policy partners) could be back on top just a few short years later – or vice versa. Take the Rajapaksas as an example: The family ruled for 10 years before being voted out of office in 2015; they were voted back into power in 2019 but now are fighting for their political lives once again. The game of thrones is never really won because it never ends.

For China, the lesson is that cultivating lasting influence in a partner country is much harder than signing a landmark document and declaring a “new golden era” in relations. Even in a country like Pakistan, where all the major political parties agree on the “iron brotherhood” with China, political instability takes a toll on how agreements are implemented and enforced – and on what a regional partner even has the energy to discuss with China in the first place.