2 September 2024, NIICE Commentary 9558
Sabina Pradhan

Over the past decade, China has significantly expanded its economic influence across the globe, and Nepal is no exception. The evolving economic relationship between Nepal and China has the potential to be mutually beneficial. As China aspires to solidify its position as the world’s foremost economic power, Nepal aims to attract substantial foreign investment to drive its economic development. This alignment of interests presents a promising opportunity for both nations.

Growing Investments and Economic Ties

In recent years, China has emerged as a major investor in Nepal. Over the last decade, Chinese investment in Nepal has surged dramatically. In the fiscal year 2009/10, Chinese investment stood at approximately NPR 715.75 million. By the fiscal year 2018/19, this figure had skyrocketed to NPR 44,546.94 million, showcasing China’s growing interest in the Nepali market. This increase in investment reflects China’s strategic intent to enhance its economic foothold in Nepal.

China’s involvement in Nepal extends beyond mere financial investment. Beijing has been instrumental in supporting various infrastructure projects, such as new railway lines and dry ports in Tibet. These projects facilitate Nepal’s access to trade routes and ports, significantly enhancing its trade capabilities. Moreover, the construction of infrastructure has not only bolstered Nepal’s connectivity but has also increased the visibility and influence of the Chinese government in the region.

China’s strategic focus on South Asia, including Nepal, is part of its broader ambition to enhance its geopolitical influence. As Nepal shares a long border with China and is situated strategically in the region, its economic and political stability is crucial for China’s broader South Asian strategy.

China’s Increasing Role in Foreign Direct Investment

The data from recent years further underscore China’s increasing role in Nepal’s economic landscape. Since the fiscal year 2015/16, China has consistently ranked as the top source of Foreign Direct Investment (FDI) in Nepal. In the first ten months of the current fiscal year, China accounted for a staggering 86.66% of Nepal’s total FDI commitments. This substantial share indicates that China is likely to remain a key player in shaping Nepal’s economic future.

China’s investments in Nepal cover a wide range of sectors, including energy, infrastructure, and manufacturing. Major projects include the construction of hydroelectric plants, roads, and other critical infrastructure. These investments not only contribute to Nepal’s development but also align with China’s Belt and Road Initiative (BRI), which aims to enhance connectivity and promote economic collaboration across Asia and beyond.

Challenges and Trade Imbalances

Despite the promising figures and the positive outlook, there are significant challenges that Nepal must address. One of the primary concerns is the growing trade deficit between Nepal and China. Nepal’s trade deficit with China has been on the rise, primarily due to the imbalance in production capacity between the two countries. China’s advanced manufacturing sector far exceeds Nepal’s, leading to a scenario where Nepal imports a substantial amount of goods from China while exporting relatively little.

The trade imbalance is exacerbated by the fact that the opening of new trade routes and increased connectivity primarily benefits Chinese exports. While these developments enhance Nepal’s access to markets, they also contribute to the widening trade deficit. This imbalance poses a significant challenge for Nepal’s economy, as it must find ways to increase its exports to offset the deficit.

The Role of Tourism

One sector that holds promise for mitigating the trade deficit is tourism. Nepal has long been a popular destination for tourists, with its stunning landscapes and rich cultural heritage attracting visitors from around the world. China, with its vast population and growing middle class, represents a significant opportunity for Nepal’s tourism industry.

If Nepal can successfully develop its tourism sector and attract more Chinese tourists, it could help alleviate some of the pressures from the trade deficit. Chinese tourists are increasingly looking for diverse travel experiences, and Nepal’s unique offerings could appeal to this growing market. Investing in tourism infrastructure, marketing, and services tailored to Chinese visitors could help Nepal capitalize on this potential.

Strategic Cooperation and Future Prospects

Looking ahead, the Nepal-China economic relationship is likely to evolve in several key ways. Firstly, continued investment from China is expected to play a crucial role in Nepal’s development, particularly in infrastructure and energy sectors. However, Nepal must also focus on addressing its trade imbalance by boosting its production capabilities and diversifying its export markets.

Strategic cooperation in areas such as technology, education, and cultural exchange could further strengthen bilateral ties. For instance, partnerships in technology transfer and innovation could enhance Nepal’s industrial capabilities, while educational exchanges could foster greater mutual understanding and collaboration.

In addition, Nepal and China could explore opportunities for joint ventures and collaborative projects that leverage their respective strengths. By creating synergies between Chinese investment and Nepali resources, both countries could achieve a more balanced and sustainable economic relationship.

Conclusion

The economic relationship between Nepal and China presents a complex but promising landscape. While China’s growing investments and support for infrastructure projects are beneficial for Nepal’s development, challenges such as the increasing trade deficit must be addressed. By focusing on boosting its export sector and leveraging opportunities in tourism, Nepal can work towards a more balanced and mutually beneficial economic relationship with China.

As both countries continue to navigate this evolving partnership, it will be essential for Nepal to strategically manage its economic interactions with China, ensuring that it maximizes benefits while addressing potential challenges. With careful planning and strategic cooperation, the road ahead for Nepal-China economic relations can lead to a prosperous and harmonious future for both nations.

Sabina Pradhan is a Research Associate at NIICE.