Last week’s geopolitical developments provided a spectre that Kathmandu is increasingly becoming a strategic battleground for China’s Belt and Road Initiative (BRI) diplomacy. Visiting US Deputy Assistant Secretary of Defense for South and Southeast Asia Joe Felter alleged that BRI investments in Nepal (and elsewhere) would only serve the Chinese interest. He reiterated the debt-trap hypothesis citing examples of burgeoning Chinese debts in Sri Lanka, Myanmar and Malaysia. The very next day following Felter’s remark, the Chinese Embassy in Kathmandu came out with a strongly-worded statement that not only countered the US position as being irresponsible, but also challenged the US: “If a country cannot provide help to the developing countries, it should at least refrain from obstructing others from assisting these developing countries.” The Chinese ambassador to Nepal Hou Yanqi called the ‘debt trap’ allegation a ‘fabricated rumour’.

Second, the government of Nepal is now reportedly ready to sign the protocol to the Transit and Transportation Agreement with China, almost three years after KP Oli signed it during his first visit to Beijing as prime minister. The protocol is the key to implementing the treaty that allows Nepali traders to use Chinese ports for third country trade. The agreement gives access to Nepal through four Chinese seaports in Tianjin, Shenzhen, Lianyungang and Zhanjiang; and three land ports in Shigatse, Lhasa and Lanzhou. Six transit points across the Himalaya will be open for Nepal-China trade, but Nepali traders can use only Tatopani and Rasuwagadhi for third country trade. The cost and other practicalities remain highly contestable. The treaty has been touted, at least in theory, as the end of the dependence on a single country, India, for transit for Nepal’s international trade.

Third, border tensions between India and Pakistan are now at one of the volcanic points in history; and Pakistan sought Chinese backing in ‘explicit terms’ to counter India. The eyes of the world were on the Chinese position given its heavy economic engagement with Pakistan through the China Pakistan Economic Corridor, a flagship of the BRI project being implemented amid heightened Indian displeasure. But China has maintained that the two ‘sovereign countries (in war) should resolve their conflict on their own’ and it was not willing to be embroiled in the bilateral row.

Implications

The Chinese refusal to side (openly) with Pakistan may well be construed to mean that BRI for China is more a mercantilist than a strategic instrument. China has invested about $67 billion under the China Pakistan Economic Corridor. Despite these realities, its preference for a ‘neutral diplomacy’ is highly meaningful. It shows that China keenly weighs its economic implications before embarking on geopolitical adventurism that antagonises India. This is understandable, though. India-China trade is growing at the rate of about 19 percent yearly, reaching about $85 billion last year. It is highly skewed in favour of China that exported goods worth of $52 billion and imported only $33 billion worth of goods. Compared to this, China’s trade with Pakistan is only $11.5 billion, though with a proportionately huge surplus of $9.7 billion. It is now clear that China would not risk this comparatively mammoth trade potential with India.

China’s challenge to countries like the US to match its financial flow to the developing countries is something new and unlikely to be fulfilled by the latter set of countries. Chinese investment support to countries like Nepal is on the verge of exceeding the cumulative sum of all financial flows from its traditional development partners like the US, Japan, Korea and India, which now are in the anti-BRI club. If all nine large projects now being considered for Nepal under the BRI—three roads, two hydroelectricity plants, one cross-border railway, one cross-border transmission line and one polytechnic institute—take off as planned, they would fetch at least $6 billion, whereas the cumulative foreign direct investment so far is barely $2.7 billion.

A new cliché, therefore, is abuzz in the corridors of Singh Durbar central secretariat: “Other countries come with a laptop filled with suggestions on how to avoid the Chinese debt trap, and the Chinese come with books of blank cheques.” What would be Nepal’s natural choice is anybody’s guess. Apparently, Nepal suffers from a huge and chronic financing gap in every sector; from infrastructure to social security. A public financial assessment has projected that Nepal will need an extra $18 billion annually to meet key UN-sponsored sustainable development goals by 2030. Another $3 billion is needed to functionalise the ‘increased’ size of the government due to adoption of federalism. But the bitter reality is that even the promise of a substantial amount of financial support, except from China, does not seem to be forthcoming so that Nepal may plan to meet such wide funding gaps. Therefore, Nepal, in a sense, has no option but to accept the instantly available Chinese offers regardless of their, as is often claimed, lurking debt trap.

Chinese anger

As is evident in the Chinese ambassador’s public anger at the US remarks, Nepal for China may not be merely another typecast engagement. Chinese strategic interest in Nepal is historically obvious primarily due to the adjoining restive Tibet and Tibetan refugee factors coupled with its long Himalayan border with about a dozen border crossing points and, in turn, Nepal’s open border with its regional geo-strategic competitor, India.

This reality, in fact, should have served Nepal as a unique advantage to further Sino-Nepal relations, away from the perceived debt trap. First, since China is clearly unwilling to accept prescriptions from ‘other’ countries in our bilateral relations, it may naturally choose to treat an immediate strategic neighbour like Nepal above and beyond pure usury objectives. Second, Nepal’s economic diplomacy must be capable of assigning some monetary value to its strategic role and location if financial support bargains persistently tend to be confined in the pecuniary perimeter.

But Nepal’s diplomacy and intelligentsia now seem to be preoccupied with incomparable examples of the Sri Lanka or Myanmar debt traps instead of trying to exploit its geopolitical strengths, as mentioned above. Besides, the enthusiasm and hope from Chinese economic and trade-transit support to Nepal have drastically dissipated compared to what they were three years ago when the treaty was first signed. The Chinese themselves are adopting a ‘wait and watch’ strategy before committing anything substantive, even on setting the dates for long pending high-level visits. The signing of the transit protocol may be a tangible departure to vindicate Chinese good intentions that Beijing values Kathmandu more than as a battleground to fight its BRI battle.

Wagle tweets at @DrAchyutWagle.