Executive Summary
This report analyses the bilateral relations between the People’s Republic of China (PRC) and the Federal Democratic Republic of Nepal, considering Beijing’s interests in South Asia according to the Belt and Road Initiative (BRI) project. We examine the economic and strategic dynamics defining cooperation between the two countries, assessing the impact of the PRC’s growing influence on Nepal’s domestic affairs.
National autonomy and the economy remain two crucial factors guiding Kathmandu’ foreign policy, because of its geographical location between China and India. Kathmandu, therefore, must balance its diplomatic manoeuvres, considering that New Delhi might perceive a rising Chinese-Nepalese relations as a threat to its nation.
Key Takeaways
- Nepal has a crucial position for the Chinese economic and military interests in the South Asian region.
- Katmandu, by implementing the policy of non-alignment and self-declared as Zone of Peace, has defined a diplomatic strategy to balance its bilateral relations with Beijing and New Delhi.
- Since 2013, Nepal has identified the BRI as an opportunity to stimulate national economic growth and improve the efficiency of its military.
Background Information
The Federal Democratic Republic of Nepal is in the heart of the South Asian region and plays an important role as a buffer zone between India and the People’s Republic of China. Nepal shares borders with India to the east, south and west, while to the north it shares a 1,389 km border with the Tibet Autonomous Region (TAR). TAR is for Beijing a strategic territory because of its position and water sources since: indeed, China’s major rivers, which play a crucial role in the country’s hydroelectric infrastructure, originate in this area.
Nepal’s particular geophysical conformation has conditioned its diplomatic relations with the PRC (formalised in 1955) based on:
- Since 1945, Nepal has remained neutral regarding conflicts in South Asia, as happened with the 1962 Sino-Indian War, fought along two disputed sectors of the Himalayan border: Aksai Chin, now controlled by Beijing, and Arunachal Pradesh, now administered by New Delhi. To ensure strategic and economic independence from China and India, Kathmandu officially adopted policies of non-alignment and a zone of peace.
- In matters of diplomacy, Kathmandu’s support for Beijing0s “One China” policy underscores the prioritisation of national security, specifically addressing the challenges posed by Taiwanese, Tibetan (in the TAR), and Uyghur independence movements.
Geopolitical Scenario
Since the launch of the BRI in 2013, Chinese President Xi Jinping described the Federal Democratic Republic of Nepal as an indispensable player in increasing Beijing’s economic-military influence in the South Asian region. Therefore, in this scenario, the People’ Republic of China aims at achieving two primary goals:
- Eroding India’s influence over Kathmandu, which is partly facilitated by Hinduism as the majority religion in both countries
- Strengthening cooperation with the Islamic Republic of Pakistan by implementing the China-Pakistan Economic Corridor (CPEC). This project, together with the China-Myanmar Economic Corridor, represents a crucial instrument to reduce the dependence of the Chinese industrial apparatus on the Malacca Sea Route, which is vital for the import of fossil energy resources from the Gulf countries.
Therefore, Beijing has strengthened economic-diplomatic influence in Nepal by ratifying several bilateral agreements, including the Memorandum of Understanding on Investment and Cooperation in Production Capacity (2017), the Memorandum of Understanding on Energy Cooperation (2018), and Framework Agreement on the Promotion of Investment and Economic Cooperation (2024).
China and Nepal have agreed to long-term cooperation on infrastructure projects, including the UT-1 Hydropower Project and Pokhara International Airport, following the ratification of these agreements. The Upper Trishuli-1 Hydropower Project, located along the Trishuli River, is one of the major hydropower plants under construction in Nepal, which is expected to be completed in 2026, providing a capacity of 216 megawatts. The Nepal Water and Energy Development Company Pvt mostly managed the works; however, the Power Construction Corporation of China Ltd is providing important engineering support.
Conversely, China CAMC Engineering Co. constructed Pokhara International Regional Airport (opened in 2023), a project costing approximately $215.96 million, funded by a loan from the Export-Import Bank of China.
Since 2016, the PRC has intensified foreign direct investment in Nepal, to increase Kathmandu’s technological and financial dependence on Beijing. This situation increases the risk of Nepal falling into a “debt trap,” where excessive debt to China could lead to a loss of autonomy and economic and financial instability. An analysis of trade flows between the two countries in the period July 2023 – April 2024 shows a gradual consolidation of this interdependence.
Bilateral trade between the two countries more than doubled in the first eleven months of the 2023/2024 fiscal year, reaching over 94.25 billion Nepali rupees (about USD 709 million), compared to 40 billion rupees during the same period the previous year. Nepal’s imports of high-tech goods from China, totalling roughly US$696 million, fuelled the growth. Conversely, while rising, Nepalese exports to China totalled a mere NPR 1.63 billion (around USD 12.3 million). The unbalanced trade structure highlights a trend toward unequal integration, bolstering China’s influence while restricting Nepal’s economic manoeuvrability.
In its bilateral dialogue with the Nepalese governments, Beijing also proposed military cooperation in Kathmandu through the provision of military aid and military cooperation. Indeed, in 2017, Beijing delivered equipment worth some $32.3 million to the Nepalese army and, six years later, Nepal signed a $45 million contract with China North Industries Corporation to supply 26 armoured personnel carriers, 72 tactical vehicles and 10,000 5.56 mm calibre assault rifles. Always in 2017, China and Nepal established the ‘Sagarmatha Friendship’ exercise, designed to foster the exchange of procedures in counter-terrorism and emergency management operations.
China views its military and training support in Kathmandu as a strategic effort to enhance border security and counter migration and trafficking issues, as well as to limit Indian influence in the Himalayan region. Additionally, it aims to bolster the China-Pakistan Economic Corridor and promote the Belt and Road Initiative by strengthening ties with Nepal and Pakistan.
Conclusion
Beijing’s interest in South Asia is changing the geopolitical balance in the Himalayan area. Nepal assumes a strategic role for Chinese infrastructural and commercial investments and increased control along the 1,389 km long Tibetan border.
Since the launch of the BRI, Beijing has adopted a multi-level approach combining investment, technical help and soft power to merge its influence in Nepal, although this growing involvement entails risks to the sovereignty of the country, with possible asymmetrical dependencies in terms of debt and strategic alignment to the Chinese interests.
Nepal is attempting to maintain a diplomatic balance between the PRC and India by adopting a non-aligned foreign policy, which is strongly influenced by its geographical location and regional rivalries. While it represents an opportunity to diversify international partners, opening up to Beijing may undermine traditional ties with India, which is keen to preserve its Himalayan sphere of influence.
In conclusion, Kathmandu will need to work to maintain its independence by taking advantage of the tensions between the major regional powers. At the same time, it must practice careful diplomacy to avoid becoming too dependent on any one country and to play an active, independent role in the region.
*Cover image: the map of Nepal (JRC (ECHO, EU), CC BY 4.0, via Wikimedia Commons)
