As Nepal Turns to the Indo-Pacific, China Worries

On March 27, Chinese Foreign Minister Wang Yi concluded his three-day trip to Nepal. During his visit, he held meetings with the country’s top leaders while also taking the time out for a hiking trip to Shivapuri. In his meeting with Foreign Minister Narayan Khadka on March 26, Wang outlined China’s “three supports” to Nepal. These include Chinese support in “blazing a development path” suited to the country, help in “pursuing independent domestic and foreign policies,” and participation in “Belt and Road cooperation” to “speed up [Nepal’s] development and revitalization.” Similarly, in his meeting with Prime Minister Sher Bahadur Deuba, Wang reiterated China’s support to safeguard Nepal’s “sovereignty and national dignity, exploring a development path suited to its national conditions, and pursuing independent domestic and foreign policies.”

Wang’s insistence on safeguarding Nepali sovereignty comes on the heels of a prolonged – and ultimately unsuccessful – campaign against the United States’ $500 million Millennium Challenge Corporation (MCC) grant.

As the deadline for MCC ratification approached in February 2022, protests in Nepal against the U.S. grant intensified. Leading from the front against the MCC were two members of the ruling coalition – the Nepal Communist Party-Maoist Center (NCP-MC) led by Pushpa Kamal Dahal and Communist Party of Nepal-Unified Socialist (CPN-US) led by Madhav Kumar Nepal. Both the parties saw the MCC as a part of the United States’ anti-China Indo-Pacific strategy. They argued that its ratification by the Nepali parliament would undermine the country’s sovereignty. Further, a spectacular misinformation campaign was unleashed in Nepal, making wide-ranging claims from an impending U.S. invasion to alleged collusion between the CIA and Nepali elites backing the MCC. Nonetheless, after prolonged deliberations, Deuba convinced his allies to support the MCC ratification to safeguard coalition unity.

Before the MCC ratification, China had adopted a low-key approach to the MCC, preferring to work behind the scenes with the pro-Beijing elites to shape public opinion in Nepal against the United States. Thus, when Washington accused China of having “actively fomented or encouraged or funded or facilitated” a misinformation campaign against the MCC, an article in the Global Times termed the American criticism “totally groundless.” However, after the MCC was ratified on February 27, China increased its criticism of Nepal’s decision.

Diplomat Brief Weekly Newsletter N Get briefed on the story of the week, and developing stories to watch across the Asia-Pacific. Get the Newsletter

In his press conference the next day, China’s foreign ministry spokesperson, Wang Wenbin, noted the developments in Nepal and stressed that international development cooperation should not follow “political strings” or “coercive diplomacy.” Soon after, an editorial in China Daily cautioned that the ratification would have “far-reaching consequences economically and geopolitically” for China and asked Nepal to “stay out of the US’ geopolitical games.” Another article in the Global Times called the MCC a “Trojan horse” designed to encircle China. Some in the Chinese foreign ministry also saw the MCC ratification as the failure of Ambassador Hou Yanqi “to stop anti-Chinese activities and to effectively coordinate with Nepali political parties,” The Annapurna Express reported on March 17. It was in the backdrop of the Chinese “failure” to stop the supposed loss of Nepali sovereignty that Wang visited the country on March 25.

Enjoying this article? Click here to subscribe for full access. Just $5 a month.

The press release issued by Nepal’s Ministry of Foreign Affairs soon after the meeting betrayed China’s hopes of restoring its prominence in the country’s domestic affairs. As opposed to the Chinese statements, which highlighted the BRI as an essential pillar of the bilateral relationship, the press release by Nepal made no mention of the BRI. It is important to note that even after Nepal and China signed the BRI Framework Agreement in May 2017, there has been no progress on any of the projects identified under the BRI. During Wang’s visit, Deuba conveyed that Nepal prefers grants over loans from China. Deuba’s insistence on receiving grants and refusing loans from China soon after ratifying the MCC compact indicates that China’s fears of losing influence in Nepal are not unfounded.

From the high point of Chinese President Xi Jinping’s October 2019 visit, when the two countries had signed about 20 agreements, Wang’s visit was an exercise in limiting damage to the Chinese influence in Nepal. Anti-China demonstrations protesting against Beijing’s interference in domestic affairs have become a frequent occurrence in Nepal. Earlier this year, protesters carried placards that read “Stop Chinese Interference” and “Down with China Government.” Further, after reports of Chinese encroachments on Nepal’s territory, there was another round of protests against China. The tensions around the MCC have only heightened this sentiment. Nepal’s former ambassador to Denmark, Vijay Kant Karna, rebuked China’s activism against the MCC as “interference in Nepal’s internal affairs by using Nepali political parties.”

Notably, soon after the conclusion of Wang’s visit, Deuba made a three-day visit to India. This was the first high-profile visit after Nepal’s parliament had published an official map showing Kalapani, Lipulekh, and Limpiyadhura as the part of country’s sovereign territory. Many in India suspected that the escalation on the border dispute under Nepal’s previous government was done at China’s behest, and the bilateral relationship soured considerably. Also, the disruption of the border status quo gave an element of permanency to the border dispute between the two countries. However, the collapse of the unity between the communist parties in Nepal, despite China’s tremendous efforts, and the subsequent formation of the Deuba government has given a re-balancing orientation to Nepal’s foreign policy. Thus, during Deuba’s India visit, the two sides only had a “brief discussion” on the border dispute while agreeing to address the issue “through discussion and dialogue” without unnecessary politicization.

So far, Nepal has remained cautious about the Indo-Pacific tilt of its foreign policy due to the fear of attracting coercion from China. The parliament’s addition of an “interpretive clause” to the MCC compact highlighted Nepal’s sensitivity to Chinese concerns. Yet, as the resolve to ratify the MCC indicates, Kathmandu’s tilt toward the Indo-Pacific cannot be ignored. In this context, the U.S. grant to build a high voltage electricity transmission network would help realize the recent Joint Vision Statement on Power Sector announced by India and Nepal. American funding for an electricity transmission network closer to the Indian border would allow Nepal to access India’s market and trade power with India.

The political reality of a landlocked Nepal has been a significant concern for the country’s political elite. Particularly, the 2015 de facto blockade imposed by New Delhi had pushed Kathmandu to bandwagon with Beijing’s BRI to showcase its resolve. However, the rise of anti-China sentiments, fears of a debt trap, and the collapse of communist party unity in Nepal have allowed Deuba to normalize ties with India. The U.S. Indo-Pacific strategy’s stated objective is to support “India’s continued rise and regional leadership” to “promote stability in South Asia.” By facilitating Nepal’s energy market integration with India, the United States is attempting to secure Nepal from China’s political and economic predominance while making a case for the continued Indo-U.S. convergence in the Indo-Pacific.