What Does Nepal Want From China?

Leading only the third largest political party in the federal parliament of Nepal, Pushpa Kamal Dahal, also known as Prachanda, is prime minister of the rather ideologically and statistically unconventional coalition between his party – the Communist Party of Nepal (Maoist Center) – the Nepali Congress, and other smaller political parties. The fact that the Maoist Center is only a fraction in the crucible of the coalition means the survival and the longevity of his government is the top priority for Dahal. In light of this pragmatic calculation, the prime minister has limited space to work on his visions of both domestic and foreign affairs.

This encumbrance is strongly visible in the making and the implementation of the government’s foreign policy. Any effort by Dahal toward a drastic foreign policy revision or any long-term bilateral agreement with China, for example, could potentially endanger his position at home and his party’s position in the government. 

This pragmatic conditionality places Dahal in a contradictory position as he seeks to balance his party’s interests and his government’s position regarding China. While his party’s ideological affinity with the Chinese Communist Party (CCP) and frequent interactions with China's second-tier leadership stimulates the Maoist Center to shape policies that resonate with communist principles, the weak position of Dahal’s party within the ruling coalition prevents the same. 

Given these dynamics, the prime minister’s week-long China visit, which began on September 23, was watched closely in Nepal and by the international community. 

Dahal made a public announcement about his interest in visiting China over the summer, immediately after returning from Delhi. The timing was interpreted by some as an expression of frustration with his failure in India to accomplish any concrete and substantial agreement on specific issues about which Nepal is concerned (such as border disputes, the Eminent Persons Group’s report on remaking India-Nepal relations, and the smooth implementation of already planned infrastructure projects). The sole victory for Nepal was Indian Prime Minister Narendra Modi’s “verbal” willingness to purchase 10,000 megawatts of electricity within a decade. 

Despite the fact that the Nepali delegation termed the India visit a “resounding success,” the reality on the ground shows a completely different picture. New Delhi has ratcheted up pressure on Nepal to dissuade Kathmandu from taking foreign economic or technical support (especially from China) to construct hydropower projects in the country, further hegemonizing Nepal’s power sector. Moreover, Dahal faced criticism at home for appearing in saffron attire during a Hindu temple visit in Madhya Pradesh, which was seen as a departure from his communist beliefs.

After failing to gain much of a boost from his India trip, Dahal’s visit to China aimed to restore his image as a communist leader and statesman focused on the national interest amid criticism and dwindling domestic support.

However, Dahal’s China visit transcended his domestic political motivations of balancing coalition interests and raised broader questions about what Nepal wants from its relationship with China and the extent of its commitment to securing these goals. These objectives encompass the broad kaleidoscope of interests and aspirations, ranging from getting benefits from Chinese economic growth and seeking help to diversify Nepal’s economy to attracting Chinese investment and developing closer people-to-people relations. 

Despite its aspirations with regard to relations with China, Nepal possesses very minimal strategic and economic leverage. This lack of leverage makes it largely a recipient, not only of Chinese economic assistance but also its political influence, and Nepal equally faces the brunt of China’s geopolitical assertiveness. This fundamental structural asymmetry is the background one has to keep in mind when it comes to assessing China-Nepal relations. 

Nepal’s Interest in Economic Diversification With China’s Support

Economic diversification is a fundamental and long-term aim for Nepal; the country’s excessive dependence on India when it comes to trade, transit, and investment is felt in every sector. This interest in diversification became more prominent and urgent after the Indian economic blockade of Nepal in 2015. Although India never acknowledged the blockade, the direct effect of the events of the time was seen in almost all sectors of Nepal’s economy and institutions. 

The blockade was a tipping point for the country, which historically had always craved greater autonomy from India. Because of Nepal’s geographic location, China remained the most important partner in this endeavor, which also coincided with Beijing’s concern for security along its Tibetan borders and its own economic interest to draw Nepal closer into its orbit. 

These mutual interests were reflected in increased Chinese investment in Nepal. For six consecutive years in the post-2015 era, China has consistently ranked as Nepal's top source of FDI, especially in the infrastructure, tourism, and hydropower sectors. Chinese investment reached $10.74 billion by 2022 and, according to the Chinese ambassador to Nepal, has created more than 100,000 jobs in the country. 

Chinese multi-million dollar joint venture investments such as Hongshi-Shivam Cement Private Limited, with a $359.18 million investment, and the Nepal-China JV, with $322 million, are examples of such large-scale investments in Nepal. The influx of funds received a warm embrace in the Himalayan country, which aims to graduate from Least Developed Country status by 2026.

The Connectivity Conundrum and Oscillating China Policies

Chinese development power excels in infrastructure, as evidenced by its remarkable achievements in expanding its internal railway and roadway networks. Such developments have not only connected billions of Chinese people to the economic mainstream but also have attracted the attention of many other developing countries. 

Grappling with the aftermath of an earthquake and an Indian blockade, Nepal naturally sought Chinese support for its infrastructure development. This led to the signing of the Trade and Transit Agreement between Nepal and China in 2016, the Belt and Road Initiative (BRI) in 2017, and the Trans-Himalayan Multi-dimensional Connectivity Network (THMCN) in 2019. These developments served as a significant moral and political boost to the political elite of Nepal. It not only resonated with Nepal’s aspiration to be a “vibrant bridge” between its two neighbors and to overcome its geographic difficulties, but it was also important to send a message to India that Nepal has options and capable leaders who can leverage them.

Yet, this halcyon moment proved to be short-lived, as disagreements over interpretations of the BRI and its funding modality (Nepal prefers grants while China prefers commercial loans) created significant divisions. Of the nine major proposed projects listed under the initiative, none has been implemented.

Nepal also failed to achieve unanimous political support for the projects. The Nepali Congress, which is one of the main coalition partners in the current Dahal-led government, is clearly not in favor of the BRI, particularly the loan package. The president of the Nepali Congress, former Prime Minister Sher Bahadur Deuba, argued that his party is not in favor of the BRI if it means taking out loans. 

While the coalition government struggles to generate consensus for the implementation of BRI projects, interestingly, the United States’ Millennium Challenge Corporation (MCC), which faced significant controversy during the parliamentary debate, is now in the process of implementation. The MCC outsripping the BRI in just one year is a stunning development for an agreement once on the verge of failing to clear the hurdle of ratification.

In a similar fashion, Nepal has been unable to operationalize the 2016 Transit Agreement and the 2019 THMCN due to political and economic hurdles. Unilateral, recurring, and unannounced border closures from China, attributed to pandemic concerns, illegal border crossings, or the absence of proper roads, further complicate bilateral trade and mobility. All these instances illustrate that bilateral project implementation in Nepal is not solely a matter of technical and economic challenges but frequently hinges on active political will on both sides.

Such a dormant approach to China-funded infrastructure projects is also because of Nepal’s excessive politicization of bilateral relations with Beijing, which brings an innate inconsistency in the Nepali approach toward China. 

China emerges on Nepal’s radar primarily in times of strained relations with India. Kathmandu’s advocating for China’s participation in the South Asian Association for Regional Cooperation (SAARC) when Nepal had troubled relations with India, or looking for China’s support immediately after the 2015 blockade are recent instances of this myopic foreign policy. However, when India-Nepal relations slightly improve, commitments to develop China-Nepal relations often wane. 

Although Nepal signed onto the BRI in 2017, during Dahal’s earlier stint in leadership, he remained notably silent on the matter and did not bring it up during his recent visit to China. His efforts to improve relations with India and the limited political influence of his party within the current coalition might account for this silence. Similarly, the two largest political parties in the country, the Nepali Congress and the Communist Party of Nepal (Unified Marxist-Leninist), are divided on their approach toward China. Such oscillating China policy remains a hurdle in bilateral relations that Nepal needs to overcome. 

Border Trade and Maintaining Historical Linkages

The China-Nepal border in the northern Himalayan region was historically a vibrant geographic space where communities along the frontier used to cross borders freely, engage in trade, and maintain family and cultural relations. With the geopolitical upheavals of the 1950s and 1960s hampering these socioeconomic linkages, the border has become more difficult. China, in particular, has imposed ever-increasing regulations on cross-border mobility. 

The hundreds of informal trans-Himalayan border crossing points that existed prior to the 1961 border agreement were reduced to six government-controlled strictly regulated border crossings, thereby limiting border exchange drastically. Out of the six border points, only two – Tatopani and Rasuwa – have proper road accessibility and functioning immigration checkpoints. Even when open, these two border crossings account for less than 3 percent of Nepal’s overall trade. 

And they are not always open. Tatopani and Rasuwa remained shut for an extended period starting in 2015, first due to the earthquake and then the COVID-19 pandemic. This closure had a substantial negative impact on the Nepali business sector, which was already grappling with the aftermath of these two disasters. Furthermore, the protracted border closure also compelled numerous communities in the northern Himalayan districts to undertake migration into the interior of Nepal. Their livelihoods, previously reliant on cross-border trade and employment, became increasingly challenging due to the border closure that persisted for several years. 

Ensuring seamless border trade while acknowledging the historical socioeconomic and cultural ties has been a longstanding goal for Nepal in its relationship with China. However, Nepal and China have opposing priorities. While Nepal places much emphasis on loosening border regulations, China instead opts for a strict border crossing regime because of its concerns about Tibetan migration toward Nepal and India. The effects of this clash of priorities are visible in Nepal’s northern border areas.

Even in Dahal’s recent high-level visit to China, no substantial agreement was reached regarding the issue of border trade, apart from agreeing to the early reopening of some of the traditional border points. No definitive agreement was reached on specifics, like the numbers of border points and the timeline for implementation, further intensifying the ambiguity and relegating the issues to the mere subject of discussion.

Potential Trade-Offs for Nepal

It is an undeniable reality that Nepal faces significant limitations in its relations with China. Nepal does not present economic competition to China, lacks a substantial trade volume, and does not possess a commanding military or regional positioning that would attract China’s attention. From an economic perspective, Nepal holds relatively lesser significance for China. 

Instead, Nepal’s importance to China is more strategic and political. The fact that Nepal lies on the southern slope of the Himalayas, adjacent to the Tibet Autonomous Region of China, and hosts more than 20,000 Tibetan refugees, holds great significance. It is in China’s interest, hence, to foster friendly ties with Nepal to prevent any potential Tibetan uprising in the country like that of the late 1950s and 1960s; to prevent the Tibetan issue from drawing further international attention through protests, such as those that occurred in Nepal in 2008; and to prevent China’s adversaries from exploiting Tibetan issues near its border as was done by the United States during the Cold War. 

Furthermore, as the global geopolitical landscape becomes more divided following the Russian invasion of Ukraine, China is increasingly viewed as a structural adversary by both the United States and Europe. The United States even included concerns about human rights in Tibet in its 2022 National Security Strategy. This heightened attention to the Tibetan issue within U.S. policy has prompted China to exercise increased vigilance not only within Tibet but also over the Tibetan diaspora writ large. China has also been irritated with the actions of the U.S. delegation in Kathmandu visiting Tibetan refugees and the EU’s increasing attention toward the Tibet issue. This increased Western attention on Tibetan affairs has contributed to elevating Nepal’s significance in China's national interests.

At a time when the West and its allies are increasingly gloomy toward almost everything that is related to China, whether it is China’s economic growth, infrastructure initiatives, technological advancements, or influence in the international politics, Beijing is increasingly pressured from all sides. In such a geopolitically charged environment, China’s interest in Nepal is also aimed at preventing Kathmandu from joining the Western camp and any military grouping hostile to China, as well as fostering a political environment that is positive toward China. Maintaining positive ties also becomes pivotal as China is increasingly struggling to mend relations with its neighbors that have been damaged by territorial disputes and Beijing’s heightened assertiveness.

During Dahal’s visit, Nepal assured China that it would give serious consideration to China’s core security in its foreign policy. Like all the governments formed in post-1990 Nepal, Dahal’s visit to China reiterated that Kathmandu strongly adhered to the “one China policy.” It is interesting to note that Nepal, going beyond its long-standing “one China policy,” agreed to the “one China principle” and also stated its position against Taiwan’s independence. Nepal further conveyed a strong message that it will not allow anti-China activities in Nepal.

Another important message that Dahal conveyed to China is Nepal’s aversion to joining any military alliance against China. In a world marked by ongoing security challenges, major powers are actively seeking to court smaller nations into their geopolitical spheres while discouraging them from aligning with alternative opposing alliances. Nepal, situated at the crossroads of geopolitical interests involving China, India, and the United States, is encountering comparable pressures, with all three nations vying to draw Nepal into their strategic orbits. 

While China strongly objects to the possibility of Nepal joining the U.S.-led State Partnership Program (SPP), it is pressing Nepal to join its own Global Security Initiative (GSI). Similarly, India had earlier extended an invitation to Nepal to participate in the BIMSTEC military exercises. Each nation is striving to prevent Nepal from aligning with its adversaries while simultaneously attempting to gain its support. This has placed Nepal in a highly precarious geopolitical position.

So far, Kathmandu has been successful in convincing all three major powers that Nepal is not willing to join any security alliance but is open to alliances that support development. This was demonstrated when Nepal joined the BRI in 2017, accepted the Millenium Compact Corporation (MCC) in 2022, and participated in many developmental initiatives initiated by India and other countries.

Nonetheless, China harbored doubts when Nepal voted in favor of Ukraine, condemning the Russian military intervention. Some foreign policy experts have gone so far as to speculate whether Nepal has shifted away from its non-aligned foreign policy and is tilting toward the Western camp. China is also wary of Nepal’s potential alignment with the West in future conflicts and has pushed Kathmandu to clarify its stance. Nevertheless, Nepal has consistently reassured China and others of its unwavering commitment to the principles of non-alignment and neutrality in foreign policy and its intent to remain so in any future conflict. Dahal’s visit to China further clarified Nepal’s stance. 

In addition to affirming Nepal’s position in international politics concerning China, it is imperative to acknowledge that the Himalayan nation has consistently negotiated trade-offs in its relationship with China. One of these trade-offs entails Nepal refraining from opposing the spread of China’s political ideology within its borders. An immediate example of this was seen in 2019 when the Nepal Communist Party (NCP) and the CCP organized a joint symposium and training on “Xi Jinping Thought” in Kathmandu, training more than 200 communist party leaders. Despite the fact that importing such a doctrinal orientation goes against Nepal’s liberal political culture, Nepal has opted to remain silent on the matter due to the favorable stance of the ruling communist parties toward such engagements.

Furthermore, Nepal’s weak response to alleged Chinese “encroachment” of territory in the western Himalayan district of Humla in 2020 signaled a willingness to shove the issue under the rug, thereby acquiescing to Beijing. The then-foreign minister even termed reporting on the incident as “fake news.” Even though the Sher Bahadur Deuba government formed a committee to examine the matter, no substantial progress was made apart from proposing a joint inspection of the border. 

Such a subdued response to Chinese “intrusion” into Nepali politics and territorial integrity stands in stark contrast to Kathmandu’s response to analogous Indian engagement. It appears that Nepal has embraced these trade-offs in exchange for increased Chinese assistance.

China’s effort to influence domestic politics did not stop there. From trying hard to mediate to prevent a split of the NCP to questioning the intention of the U.S.-funded MCC and publicly criticizing India’s policy toward Nepal as a “policy of constraints,” China is currently openly trying to influence Nepal’s domestic politics and its sovereignty to take its own decisions. Even though it is often natural for bigger powers to try and shape discourse and narratives in smaller states, it seems the Nepali state is trying to ignore such foreign intervention as bigger economic and geopolitical relations are at stake.

Conclusion

Whether it’s the declining trade ties between Nepal and China, the underperformance of Chinese-funded infrastructure projects such as the airports in Pokhara and Bhairahawa, grounded aircraft purchased from China, the lack of progress in the BRI, Nepal’s decision to endorse the MCC, or the split of the Nepal Communist Party, whichever indicator one may pick, the current state of China-Nepal relations is not very promising. 

In such a scenario of economic and political challenges in bilateral relations, Dahal's visit to China carried high hopes but subdued expectations because of the prime minister’s constrained position in the ruling coalition. The same domestic political pressure seemed to rein Dahal in, causing him to not to be overly ambitious in his government’s relations with China. 

Unlike his first term, when he broke from the tradition of visiting India first, by the time Dahal came into his third nonconsecutive term, he ended up visiting India, Europe, the United States, and the United Nations before stepping on Chinese soil. This pattern of visits may not necessarily signify the priorities of Dahal’s administration; it displays, rather symbolically, his timid rebounding to the traditional foreign policy orientation dictated by his coalition partners.

Apart from this evaluation of his personal and party-specific interests, the visit should also be judged based on its success in addressing the core interests of the country. In line with its commitment to a non-aligned foreign policy, Nepal succeeded in avoiding any “controversial” and long-term decisions such as participating in the GSI or signing any military agreement. 

However, the visit was not very successful from a developmental and economic perspective. The lack of any further discussion on the question of the BRI seems to indicate that neither Nepal nor China is prepared to proceed with the project in its current state. Similarly, the delegation was not successful in agreeing on the THMCN, the operation of new airports, economic investment in the Himalayan country, or any significant connectivity projects that were promoted by the prime minister himself before embarking on the visit. Nor was he able to get any response from China regarding the hyped issue of recognizing the new political map of Nepal. 

In general, the visit was friendly and diplomatic in nature, but it did not yield any significant economic or developmental benefits for Nepal. It is likely to be remembered as just another diplomatic event in history with no significant achievements to its credit.