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Nepal: China’s bridge to lucrative India

BEIJING // Nepal’s prime minister Khadga Prasad Sharma Oli returned home on Sunday after a week-long visit to China and walked straight into a government row that threatens a raft of multibillion-dollar agreements signed while in Beijing.

Mr Oli’s political partner in the coalition government, the Unified Communist Party of Nepal (Maoist), is threatening to withdraw support on the grounds that shelters for victims of last year’s earthquake victims have still not been built and little has been done to curb the black market in essential commodities. The threat has put at risk the 15-odd agreements signed last week between Nepal and China.

The prime minister signed a range of groundbreaking deals that could significantly enhance Nepal’s business links with China while reducing its dependence on India. They include establishing electricity transmission lines and speeding up an old Indian agreement to expand the Himalayan nation’s Pokhara Airport.

China also agreed to establish crucial petroleum storage facilities. Nepal has been woefully dependent on India for its energy needs covering petroleum products and electricity. Beijing also agreed to repair and upgrade two major motorways that have been seriously dilapidated in parts. They also began initial discussion on a possible free trade agreement (FTA).

But “the biggest achievement is the programme of connectivity, both physical and institutional, between the two countries”, Hu Shisheng, a director at the China Institutes of Contemporary International Relations, tells The National. “We have agreed to build railway and road linkages, and also work towards signing an FTA.”.

Mr Oli’s supporters are elated.

“This is a historic moment in Nepal’s history. We are opening our doors wider by joining hands with China. We have so far been dependent on India,” Rajan Bhattarai, a member of the ruling Communist Party of Nepal (Unified Marxist Leninist), tells The National.

Some analysts say China’s apparent interest in Nepal belies a grander scheme.

“I don’t think China is very ambitious about Nepal. It is too small and underdeveloped to serve Beijing’s larger economic interest, which India holds,” says Pramod Jaiswal, a senior research officer at the Institute of Peace and Conflict Studies in New Delhi.

China’s ultimate goal is a lot bigger than lighting up the Himalayan nation and giving it roads, Mr Jaiswal says. Beijing’s main intention is to first connect its border with Nepal, and then build road and rail links through the country to Lumbini on the Indian border, which is more than 300 kilometres away.

China is, in reality, eyeing the Indian market. The Chinese president Xi Jinping made no bones about it when he told Mr Oli last week: “Nepal can be a bridge between China and India.”

Mr Hu says: “China wants to connect the entire South Asian region after linking Nepal with railways. In future, we can connect this line to the Indian railways, and stretch it further to Bangladesh and Myanmar. That way we can reach the sea and the Indian Ocean. It will be good for all countries in the region”.

Power is high on Beijing’s agenda also. Chinese companies are keen to set up new photovoltaic stations for generating solar energy in Nepal. With its crippling electricity shortages, Nepal offers a new market.

However, Chinese solar makers are also eyeing the bigger opportunities in the lower Himalayan regions on the Indian side that also suffer from electricity shortages. They are keen to develop in Nepal because that could be the first step to exploring the larger market in India’s energy starved hilly regions.

The main challenge for the firms will be to match production costs to the low purchasing power in Nepal, and the mountainous regions of India if and when government subsidies are withdrawn.

Perhaps most importantly for Nepal, China said it will consider building a cross-border railway line and a rail network within Nepal. The plan involves extending the Tibetan railway line to the Nepali border and connecting three major cities — Kathmandu, Pokhara and Lalitpur — of the Himalayan kingdom with a new rail network.

“Transit links with China will open up unprecedented business opportunities for Nepal,” says Mr Bhattarai.

For Nepal, sandwiched between India and China, the Oli venture represents a historic shift. At present, more than 90 per cent of Nepal’s foreign trade passes through India, which shares 26 border crossing points including four integrated check posts that are under construction. There are only three trading points with China, and only one of them — in Kerung in north-eastern Nepal — is currently used for bilateral trade. In addition, the Nepal-China route is closed for at least five months a year because of heavy snow and related weather problems in the Himalayas.

There are some sceptics who regard the agreement signing in Beijing as just photo opportunities meant to send out positive diplomatic signals while poking a stick at India. “Mr Oli is merely swinging the Chinese card to get back with India. I don’t think these agreements will be implemented. We don’t expect him to last in the government beyond May this year anyway,” Amresh Singh, a member of the opposition Nepali Congress Party, tells The National.

Mr Jaiswal points to other hurdles: “China’s offers for building rail and road links to Nepal will be possible only when India is comfortable about it. Without taking India into confidence, China cannot implement its One Belt, One Road plan in Nepal.”

He disagrees with any comparison to the 1,200km long China Pakistan Economic Corridor, in which Beijing has promised to pour US$46 billion. The corridor plan, signed late last year, involves constructing nuclear and thermal electricity plants, an industrial estate and a 1,200km road linking China’s Kashgar city in Xinjiang with Pakistan’s deep-water Gwadar Port on the Arabian Gulf coast.

“Unlike Pakistan, which provides access to the sea and ultimately the Indian Ocean, Nepal has very little to offer. It is a land locked country with a tiny economy,” Mr Jaiswal says.

In contrast to the sceptics, some observers expect an almost immediate rush of Chinese businessmen flowing into Nepal.

Several countries including Myanmar, Pakistan and African nations have witnessed the phenomenon of Chinese businessmen flooding in to occupy markets immediately after signing diplomatic deals with Beijing. There have been frequent complaints that aggressive Chinese businessmen, backed by abundant supplies of cash and low-cost goods, expose the weak competitiveness of local industries and push them towards closure.

Mr Singh disagrees. “The situation in Nepal is different. We don’t have electricity for 12 hours a day, and it will take four to five years for power projects to come up. Chinese investors will find it very difficult to operate here,” he says.

If the agreements do become reality, Chinese railway and construction companies may have to brace themselves for heavy costs. The railway, road, electricity and airport projects offer very low rates of return, say analysts.

With China’s economic slowdown, Beijing has started re-evaluating its aid programme, which includes concessional loans to less developed countries that offer strategic and military advantages or agree to buy Chinese machinery for industrial and infrastructure projects. Analysts say Chinese firms including state owned enterprises are reluctant to accept losses for the sake of taking forward the Beijing’s foreign policy of overseas expansion at a time when they are suffering at home.

Mr Jaiswal says, ultimately, India will determine the outcome.

“China would deliberately move slowly in Nepal,” he says. “It will calibrate the pace of project implementation according to India’s reactions.

“For sustainable progress in [One Belt, One Road], greater political commitment and the support of India is important.”


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Updated: March 29, 2016 04:00 AM

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