Dancing with the Dragon : The Road Ahead to Nepal-China Economic Relations

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Dancing with the Dragon : The Road Ahead to Nepal-China Economic Relations

As the influence of China grows in the world, Nepal, too, cannot afford not to walk the plank of Chinese economic ambitions.
 
-- BY SANJEEV SHARMA
 
A previously little-known locality of Jhapa spreading across areas of Kamal Rural Municipality and Gauradaha and Damak municipalities has caught national attention due to its high economic significance. Located about 9 kilometres from the Damak section of the East-West Highway, the area is poised to become the largest and most advanced industrial zone in the country after the completion of the construction of the Damak Clean Industrial Park (DCIP) in 2025. 
 
The park which will cover an area totaling 2,200 bighas (1,490 hectares) of land will host 90 international standard manufacturing plants of, mostly Chinese industries, including electronics, garments, automobile and food processing providing employment to up to 70,000 within the first five years of its opening. Costing an estimated Rs 333 billion, it will be the biggest investment made in a single project in Nepal so far. The project will have collaborative funding of Chinese and Nepali investors. DCIP is being constructed under China’s ambitious Belt and Road Initiative (BRI). The Chinese money for the project will be channelised through BRI. Nepal became a signatory to the BRI (formerly One Belt One Road) agreement framework in May, 2017.  
 
Growing Chinese Investment
The construction of the park is one of the several examples highlighting the growing economic influence and engagement of China in Nepal. This marks a considerable change in Nepal-China cooperation from over a decade ago when the northern neighbour used to be taken just as a well-wisher of the Himalayan nation. From road connectivity to hydropower development, industrial sector investments and post-quake reconstruction efforts, China has significantly made its presence felt in Nepal in recent years. 
 
Official data shows that China has consistently increased investments in multiple business sectors here in the last 10 years. In FY2065/66, such China’s investments totaled Rs 1.15 billion which reached Rs 44.54 billion in FY2074/75. Data provided by the Department of Industries (DOI), a body under the Ministry of Industry, Commerce and Supplies, shows that Chinese investments are particularly increasing in the areas of energy, manufacturing, minerals, services and tourism.
 
There are clear indications that the investment of China in Nepal will increase further in the coming years.  Since FY 2015/16, China has consecutively managed to be in the top position in terms of FDI commitment in Nepal. China accounted for a staggering 86.66 percent of FDI pledges received by Nepal in the first 10 months of the current fiscal year. According to DoI, FDI commitments during the period amounted to Rs 49.87 billion, of which Rs 43.22 billion came from China. This was followed by India at Rs 4.04 billion. The willingness of China to invest in Nepal was distinctly displayed at the government organised Nepal Investment Summit, 2017. Chinese investors who participated in the two-day event held in the first week of March signed letter of intents amounting to USD 8.3 billion which accounts for about 60 percent of the total FDI intent of USD 13.51 billion registered during the summit.  
 
 
An Emerging Superpower’s Backyard 
Since the establishment of the Peoples’ Republic of China in 1949, issues related to Tibet Autonomous Region have remained a top concern for China in terms of its national security and stability. The country’s foreign policy approaches in Nepal have been guided by such concerns. China wants to ensure that its neighbour stays politically stable so that the rivaling powers can have little or no ground to pose any threat to it from here. This will likely remain a top concern for China in the future. 
 
Nevertheless, the country’s priorities and focus have been changing with changes in the global economic order. In this post-global financial crisis period when the traditional dominance of United States and other western powers seems to be fading gradually due to their internal political and economic problems, China has been trying to position itself as a champion of globalisation in the 21st century.  
 
“To become a superpower, a country needs economic strength, military might, big geographical size and population.  Besides, the country also needs an idea that it follows and others emulate,” says Prof Dr Sambhu Ram Simkhada, convener of CNI Think Tank, a group affiliated to the Confederation of Nepalese Industries (CNI), comprising of 15 eminent Nepali intellectuals formed in 2016. Dr Simkhada who in the past has served as Nepal’s Ambassador to Switzerland and Permanent Representative of Nepal to United Nations in Geneva, notes that China has been taking strategic moves to realise its ambitions of becoming a superpower. 
 
Presently, China is trying to change its often ridiculed image of the ‘supplier of cheap goods’ by presenting itself as the leader in global economic affairs. Its initiation in establishing the Asian Infrastructure Investment Bank (AIIB) can be taken as an example in this regard. Officially proposed by China in 2013, the Beijing-based AIIB is a multilateral development bank which was formed after 21 nations, including Nepal, reached an agreement on October 24, 2014.  It is expected to rival supranational institutions like The World Bank and International Monetary Fund that over the years have received criticism from many emerging and developing nations for being unfair to them.
 
 
Connecting the South Asian Dots in Global Trade
In the meantime, China has been moving ahead with the ambitious Belt and Road Initiative (BRI) strategy, despite several criticisms and suspicions. Many western and Asian critics view BRI as a tool for China to spread and amplify its influence in a large part of the globe. Nevertheless, China has maintained that the aim of BRI is to integrate the markets of the Eurasia region, thereby enhancing cooperation among the countries for peace and prosperity. In the words of the Chinese government it is "a bid to enhance regional connectivity and embrace a brighter future" and will start “a new era of globilisation.” 
 
Basically, BRI is a USD 1 trillion project comprising of two major parts as the Silk Road Economic Belt, a land connectivity inspired by the ancient Silk Road, and the 21st Century Maritime Silk Road, a sea connectivity based on a number of ports and railway linkages.     
 
In this scenario, strengthening the bilateral relationship with Nepal has become an important agenda for China.  Besides its Tibet related concerns, Nepal’s significance for China lies as an access route to the large and fast emerging South Asian markets and essential sea lanes in the Indian Ocean to trade with the rest of the world. “China seems to have considered Nepal as a potential route for transit and transport. For instance, any disturbance in the sea lanes in the South China Sea can distort its trade with South Asia and the rest of the world,” opines Prof Dr Simkhada. “As an export-oriented economy, the country has to ensure all its lines of export and channels of transportation are always kept open,” he adds. Home to 25 percent of the world’s population, the markets of the South Asia region have emerged as consumer powerhouses with the increasing purchasing capacity of people living there.  
 
Under BRI, China has been rapidly developing connectivity infrastructures in Tibet to link Nepal.  The launch of the Guangdong-Tibet-Central South Asia Railway Line in late 2016 has been considered as an important step in this regard.  The aim of developing this railway line has been to connect Nepal’s capital Kathmandu with the Kyirong Trading Port in Shigatse, Tibet. It has recently announced that a railway line linking Shigatse and Kathmandu will be constructed under the “Trans-Himalayan Multi-Dimensional Connectivity Network” agreement. 
 
The overarching framework agreement was signed by Nepal and China during the six-day official visit of Prime Minister KP Sharma Oli last month. Under this, enhanced connectivity of roadways, ports, railways, civil aviation, telecommunications, internet and electric transmission will be developed between the two neighbours. The new agreement is aimed at implementing the BRI framework agreement signed by Nepal and China in 2017. 
 
Warming Nepal-China Business Sector Ties
Nepal-China relations took a new turn in 2015 after KP Sharma Oli became the Prime Minster for the first time. In a response to the Indian economic blockade over the promulgation of the new constitution, PM Oli’s northward turn was well received by the northern neighbour.
 
In October 2015, Nepal and China signed agreements of long-term significance in the areas of energy, connectivity and industrial infrastructure, among others. The latest visit of the Prime Minister has been considered as something different from the previous trip. 
 
“This time, the Nepali delegation included the representatives from the private sector. This makes the visit different from earlier ones,” says Haribhakta Sharma, president of Confederations of Nepalese Industries (CNI) who was among the 52 Nepali business community delegates in the PM’s China tour. The private sector representatives have inked investment agreements amounting to Rs 185 billion with their Chinese counterparts in the areas of hydropower and food processing. 
 
Padma Jyoti, Pradeep Kumar Shresrtha, Bhawani Rana, Shekhar Golchha, Pashupati Murarka, Chandra Prasad Dhakal, Krishna Prasad Adhikari, Manish Khemka, Rajesh Kaji Shrestha, Kamlesh Kumar Agrawal and Deepak Malhotra were among the private sector delegates in the PM’s visit team. 
 
Chinese and Nepali investors have agreed joint venture investment amounting to Rs 180 billion to develop four hydropower projects having a total installed capacity of 897 megawatts. Similarly, a joint venture agreement of Rs 4.6 billion was also signed to establish a fruit processing industry. Likewise, Mahaprasad Adhikari, CEO of Investment Board, Nepal (IBN) also inked a Rs 14.40 billion investment deal with the vice-president of Huaxin Cement to establish a cement plant. China has also agreed to import 200,000-500,000 units of Pashmina from Nepali producers annually. In the meantime, the Chinese government has pledged to expedite development of the proposed Koshi, Gandaki and Karnali economic corridors. The two sides also joined hands to exchange visits for cultural, educational and tourism collaborations.
 
“The implementation of agreements will take Nepal’s economy to new heights. Both countries have given top priority to the Trans-Himalayan Multi-dimensional Connectivity Framework. It’s a big achievement for Nepal to sign an agreement for the construction of the Kyirong-Kathmandu railway,” notes Kamalesh Kumar Agrawal, vice-president of Nepal Chamber of Commerce. He predicts that the Chinese train may enter Nepal in the next seven years after the railway line and other necessary infrastructures are constructed. 
 
Export Potential Still Issue
Nepal is heavily reliant on imports. Years of political instability, labour issues, energy shortages and lack of raw materials to produce goods in the country have contributed to the significant erosion of the productive capacity of Nepali industries. Currently, India is the largest trading partner of Nepal. In 2017, Nepal imported goods worth USD 6.56 billion from India against exports totaling USD 4.18 billion thereby registering a trade deficit of USD 6 billion with its southern neighbour. Meanwhile, Nepal’s trade gap with its second largest trading partner China is also substantial at USD 1 billion. Nepal’s imports from China amounted to USD 1.27 billion in 2017 compared to exports totaling a meagre USD 224.18 million.  
 
“Percentage wise, Nepal’s trade deficit with China is much higher than India,” says Prof Dr Simkhada. He cautions that the trade imbalance is likely to swell in the upcoming years with the increase in land and air connectivity between the two neighbours. Located between the world’s two most dynamic economies with the biggest markets, there is a readymade access to the markets available for Nepal for all types of goods and services. “Capitalising on the opportunities is challenging. Increasing economic productivity by boosting agricultural and industrial activities is a precondition,” he mentions, adding, “The current lethargic and manpower exporting activities won’t take Nepal anywhere near the benefits that can be derived from the available economic opportunities.” According to him, the mostly underutilised duty-free-quota-free (DFQF) access for more than 8,000 Nepali products which China has been providing to Nepal since 2009 is an example in this regard.
 
CNI President Sharma is of the view that our concern now should be on finding efficient ways to export Nepali products to the Chinese market. “If the export procedures are easy and free of hassles, then Nepal will be able to export products in huge quantities,” he suggests.
 

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