Diplomatic Eye: Episode 2

Nepal- China Relations and BRI: How to Avoid Debt Trap? (VIDEO)

Nepal and China have a long history of cordial relationship. Nepali monk Buddhabhandra visited China in the early 5th century; Princess Bhrikuti of Nepal married to Tibetan King in the 7th century and Nepali artist Arniko visited China and contributed the art of Pagoda style in the 13th century.

By reviving the long-standing cultural, social, and economic links between the two nations in a way that is relevant to contemporary circumstances, the diplomatic relations between Nepal and China established on August 1 marked a landmark in the foreign policy of Nepal. Two governments have further agreed that the following five principles:

-Mutual respect for each other’s territorial integrity and sovereignty


-Non-interference in each other’s internal affairs for any reasons of an economic, political or ideological character

-Equality and mutual benefit

-Peaceful Co-existence

By 1960, Nepal and the People’s Republic of China had established formal diplomatic ties and exchanged resident ambassadors. In 1956, a new treaty was signed between China and Nepal that put an end to the Treaty of Thapathali of 1856 and Nepal acknowledged Tibet as a province of China. In 1960, Nepal and China signed a separate treaty of peace and friendship that included a boundary adjustment agreement. Nepal remained impartial throughout the 1962 Indo-China War. Since that time, the two sides have maintained amicable ties while adhering to the five principles both in law and spirit. Over the past ten years, Chinese President Xi Jinping has outlined a number of initiatives, including the Belt and Road Initiative (BRI) in 2013, Global Development Initiative (GDI) in 2021, Global Connectivity Initiative (GCI) in 2022, and Global Security Initiatives(GSI) in 2023. He has asked the international community to support these ideas. Nevertheless, I am going to highlight on Belt and Road Initiatives, Nepal’s positions and Case of Srilanka.

One Belt One Road
A corridor connecting China with Mongolia, Central Asia, Russia, Iran, Turkey, the Balkans, Central and Eastern Europe, and ultimately Germany and the Netherlands was the goal of a visit by Chinese President Xi Jinping to Kazakhstan and Russia in the fall of 2013. The “Economic belt” is this. A “Maritime Silk Road” connecting South East China with South East Asia, Bangladesh, India, the Persian Gulf, and the Mediterranean finally finishing in Germany and the Netherlands was announced by Chinese Prime Minister Li Keqiang on a subsequent visit to South East Asia. The One Belt One Road (OBOR) strategy is the modern rebirth of the historic Silk Road, which connected over 60 nations with a combined population of over four billion, and which contributed nearly one-third of the world’s GDP.

Six Economic Corridors
China Mongolia Russia Economic Corridor

New Eurasia Land Bridge Economic Corridor
China-Central Asia-West Asia Economic Corridor
China-Pakistan Economic Corridor
Bangladesh-China-India-Myanmar Economic Corridor
China-Indochina Peninsula Economic Corridor

Among these six economic corridors, let me briefly highlight the two which have strategic importance in terms of connectivity and India’s indisposition to be a part of; they are: CPEC and BCIM-EC

As far as CPEC is concerned, this corridor connects Pakistan’s Gwadar Port in the south to Kashgar, Xinjiang in the north. For the construction of roads, railroads, oil and natural gas pipelines, optical fiber networks, and ports from Kashgar to Gwadar, two governments have developed a tentative long-term plan. The projects include the upgrading and reconstruction of the Karakoram Highway, a brand-new international airport, an expressway connecting Karachi and Lahore, and a cross-border optical fiber network between China and Pakistan. Former Indian ambassador to Nepal Rakesh Sood claims that Pakistan is an integral element of BRI as it is a member of the Sino-Pak economic corridor. As some of the projects are situated in Pakistan-occupied Kashmir and the Northern regions, which India continues to be a part of, this has raised security concerns in India. The decision by the Chinese president to invest US $ 47 billion in the rail and road network linking West China to the important port of Gwadar in Pakistan has angered India because the trade route and rail road link pass through Pakistan-occupied Kasmir. India claims that it jeopardizes both its security and sovereignty. This is one of the reasons why India has emerged as the BRI’s most vociferous critic.

The joint working group for the Bangladesh-China-India-Myanmar Economic Corridor (BCIM-EC) met for the first time in December 2013 in Kunming, China, where they agreed to cooperate in sectors like commerce, investment, and people-to-people connectivity. The effort appears to have lost its ownership, direction, and goal. India and Myanmar both stopped referencing the BCIM after 2015. While emphasising its more than 2000-kilometer border with China and unique relationship with that country, Myanmar has since 2019 advanced the bilateral project known as the China-Myanmar Economic Corridor (CMEC).

According to Mahendra P Lama, Myanmar hosted the most recent BCIM Forum in 2015. Senior government representatives have always represented Bangladesh, China, and Myanmar, however in the case of India, delegations were primarily made up of think tanks, businesspeople, and former diplomats. India has never actively and directly engaged (July 28, 2020, The Kathmandu Post).

Nepal and China had signed a framework agreement on BRI on May 12, 2017. This was valid up to May 12, 2020, subject to renewal, according to Article 5.1 of the agreement paper. (Giri, 2019).

Peters, (2019) states that the idea of a railway linking China to Nepal has captured imagination since Mao Zedong and King Birendra first mooted the idea in 1973. During Chinese President Xi Jinping’s official visit to Nepal in October, plans to carry out an extended, detailed feasibility study into China-Nepal railway project were among 20 agreements signed between the two countries. Initial budget for the railway would cost approximately USD 3 billion. The 70 KM railway line, some argue to be a ‘game changer’ while others term it as ‘vulnerable’. The route that climbs from 1,400 meters above the sea level to around 4,000 meters goes through the Himalayas. This route, according to geologist, will be vulnerable to landslide and earthquakes. Moreover, as much as 98 percent of the route would have to be made up of tunnels and bridges. Steep slopes, complex geographical terrain and need for a huge investment on tunneling would be a great challenge. An astonishing fact is “passenger trains will even need to carry oxygen”(Mrigendra Bahadur Karki as cited in Peters, 2019). Wildlife experts argue that the railway route passing through the national parks (Langtang and Shivapuri) would have environmental threat to the nature and wildlife. Many endangered species both birds and mammals will disappear in near future. Ornithologists believe that these two national parks are home to one third of the country’s bird species.

Both Nepal and China have identified nine projects as part of the BRI.  The BRI identified nine projects, including the

Kerung-Kathmandu rail;

Kimathanka-Hile road development;

Rasuwagadhi-Kathmandu road improvement;

Galchhi-Rasuwagadhi-Kerung 400kv transmission line;

Dipayal-Chinese southern border road construction;

Tokha-Bidur road;

426MW Phukot Karnali hydroelectric project;

762MW Tamor hydroelectric project; and

The Madan Bhandari Technical Institute.

However, a Tweet from the Chinese embassy in Kathmandu sparked debate in the Nepali media just one day before the opening of the Pokhara Regional International Airport. The Chinese embassy in Nepal stated on Twitter that “This [Pokhara airport] is the flagship project of the China-Nepal BRI cooperation.” It was never stated in the documents that the Pokhara airport is covered by the BRI. However, if there are any records that haven’t been released, the relevant authorities must make them public.

Major ongoing initiatives funded by China include some of the following:

Power plant and transmission line projects for the Upper Trishuli Hydropower Project

Assistance with food and materials in the 15 northern bordering districts.

Larcha (Tatopani) and Timure (Rasuwagadhi) Frontier Inspection Station Project

Pokhara International Regional Airport

Upgrading Syaprubensi- Rasuwagadhi Road

Upgrading  Civil Service Hospital

Kathmandu Ring Road Improvement Project

Improvements to the Kodari Highway and repairs to the bordering bridges in Rasuwagadhi and Kodari

Zhao Leji, Chairman of the Standing Committee of the Chinese National People’s Congress, expressed gratitude to Nepal for its active response to and support for the GDI as well as its welcome support for and participation in the Global Security Initiatives(GSI) and the Global Connectivity Initiative (GCI) to jointly promote peace, stability, and prosperity in the region and the wider world. He made these remarks during a meeting with Ganesh Prasad Timlsina, Chair of the National Assembly, recently.

At the Great Hall of the People in Beijing on Monday night (June 13,2023), Timilsina spoke with Zhao. He asserted that Nepal’s foreign policy forbids it from joining any security or military alliances, despite persistent requests by Chinese leaders for Nepal to support the GSI from Nepali leaders, bureaucrats, and diplomats.

Sri Lankan Case of BRI:
Sri Lanka has experienced the commercially failed Hambantota Port Project (Basu, 30 April, 2019). Sri Lanka sold 70 percent of its stake in the port to a Chinese state-owned firm on a lease for 99 years to repay the debt it owed Beijing.

India was the first country Sri Lanka requested for financial help to build Hambantota Port, however, the request was rejected as India deemed the project commercially unviable.

In 2006-2007, Sri Lanka tried to seek a preferential loan from China, but China was unable to provide funds. Then Sri Lankan official negotiated on London InterBank Offered Rate (LIBOR), that was around 5.5% and rising Export Import Bank of China agreed to fund 85% of Hambantota port’s first phase construction with a 15 year commercial loan of USD 306 million at an interest rate of 6.3% including a management fee of 0.3 % (Wenhong, May 2019). SLPA (Sri Lanka Ports Authority) operated the port from 2012 to 2014. It saw little traffic. Business failed as SLPA did not have a Strategic International Partner. Hambantota Port was unable to generate adequate revenues to meet its debt obligation. By the end of 2016, it suffered loss of USD 304 million. “China neither enticed nor compelled Sri Lanka to borrow money. Sri Lanka’s total sovereign debt prior to May 2019 stands at about USD 65 billion, China only accounts for USD 8.5 billion of the total foreign debt, of which Hambantota Port is only USD 1.2 billion” (Wenhong, May 2019).

Sri Lanka’s corporate governance systems and practices have been largely influenced by the British system and post-government economic policies. Common issue of corporate governance is concentrated ownership (institutions, directors and individuals). Very small percentage of equity holders control large amount of shares. Some corporate scandals in Sri Lanka are: the bankruptcy of Pramuka Bank, Vanic Incorporation, Lanka Marine Service Ltd, Sri Lanka Insurance Corporation and the Golden Key Credit Card Company (Kalainathan and Vijayarani, 2014).

In this context, a scholar argues that “Lack of transparency in loan repayment terms, difficulties in accessing finance and poor environmental standards are all making countries rethink their strategy”(Basu, April 2019).

How Nepal can be benefiting: Minimizing reliance on India
India has already imposed three blockades on Nepal. In 1970, the first blockage occurred.

As a trading route with China, Nepal developed the Kodari Highway between Kathmandu and Tatopani. In 1970, India impeded the entry of commodities into Nepal. It did not, however, persist very long.

The second blockade, which began in April 1989 and lasted for 15 months under the guise of purchasing Chinese weapons, was imposed.

The third one happened in 2015, when there was a four-month border blockade between India and Nepal. It started just after Nepal’s new constitution was enacted on September 20. At this time, the people of Nepal were beginning to recover from the tragic and destructive earthquake of April 2015.

The blockade not only caused a crisis in Nepal due to the shortage of fuel, medicines, and other necessities, but it also increased resentment and hostility towards the Modi government. Through this obstruction, the ‘first neighborhood’ policy was tasted.

Nepal had to consider alternate trade routes due to the economic blockade. Nepal was forced to seek north in order to diversify its commerce and end its unbalanced dependence on India. One researcher claims that Nepal can profit from important assets including the railway, energy plant, gas pipeline, and road network in its northern region. Telecommunications and ICT, transnational transmission lines, urban infrastructure, and hydropower projects can all present potential.

Since completing the on-site electrical testing work in Nepal on February 24, 2023, the cross-border power line between China and Nepal has made progress. The cross-border power grid interconnection project between both countries’ project director said that the project is essential for luring Chinese investment into Nepal’s hydropower industry and for selling electricity to China. The 70-kilometer project will enable electricity exchange between the two nations and be able to transport 5,000 MW of power across the border, according to Global Times on June 10, 2023. This will be a different approach to reducing Indian reliance on Nepal’s hydropower industry.

Nepal should safeguard its national interests prioritizing the agenda on fostering Nepal-China relations. The following recommendations are given:

Priority should be given to affordable road connectivity over pricey train connectivity.

Nepal should not be a part of China’s Global Security Initiatives(GSI).

The establishment of industrial parks and the search for suitable locations for semi-industrialization while utilizing our core capabilities should be the top goals.

Chinese investment should concentrate on large-scale initiatives like mega hydropower, world-class universities outside of Kathmandu, and housing projects in smart cities, rather than competing with local investors.

China should refrain from making investments in delicate industries including telecommunications, hotels and restaurants in Kathmandu, hospitals, and colleges.

Small and Medium-sized Enterprises (SMEs) engaged in pottery, wood and metal carving, and other traditional handicraft companies shouldn’t be harmed or replaced by Chinese investment.

Chinese capital shouldn’t be used to purchase land.

Chinese FDI may be acceptable in manufacturing, including the construction of assembly lines for automobiles, bicycles, and motorcycles, among other things.

The ecological balance and climate change are important challenges.

Polluting industries that harm our environment shouldn’t be selected.

It might be a good idea for the BRI to incorporate environmental, social, and corporate governance (ESG) concerns into its business processes in order to uphold the highest international standard.

Additionally, it is frequently argued that investments in infrastructure in underdeveloped nations frequently result in corruption, pollution, and violations of human rights (Belt & Road News, 2019).

The three major policy-level recommendations are:

  1. The initiative needs to be more transparent and subject to closer examination.
  2. The BRI Steering Committee needs to be established.
  3. To stop bribery and corruption, an international standard regulatory governance structure needs to be formed.