China’s national interest
The 2008 financial crisis marked a change in global dynamics for Chinese exports as it disrupted the demand chain for Chinese goods and put an end to its export led growth. Following the global crisis, big economies were forced to deleverage and cut down on consumption by importing less, which deteriorated China’s current account balance from 10% (of GDP) in 2007 to 2% in 2013. Prior to 2008, China had long enjoyed double digit growth owing largely to its trade surplus. However, China’s low yielding assets comprising mostly of international reserves and surplus of savings were of no good to the Chinese economy in the long run. Therefore, in order to diversify its investments with an expectation for high returns, the government laid out incentives to Chinese enterprises willing to investment overseas in the following areas:
- Resource exploration projects to mitigate the domestic shortage of natural resources
- Projects that promote the export of domestic technologies, products, equipment and labor
- Overseas R&D centers to utilize internationally advanced technologies, managerial skills and professionals
- mergers and acquisitions that could enhance the international competitiveness of Chinese enterprises and accelerate their entry into foreign markets
Chinese FDI in Nepal
Of the total USD 505 million in FDI received between 2017 and mid-July 2018, Chinese investment account for 84% (USD 427 millions) of Nepal’s total foreign direct investment (FDI). Aligned with China’s national interests, the investments are mostly clustered in energy-based industries. Moreover, mineral, manufacturing and forest based industries have also witnessed a rise in Chinese FDI, demonstrating a shift in China’s priority when it comes to investing in Nepal.
Although China’s FDI is largely driven by its long term development strategies, China has additional and more specific areas of interest in Nepal and its investments are commonly found to be in harmony with its national priorities.
Energy security and natural resources
As China begins to emerge as a global super power, there is an increasing need to provide energy to fuel the growth of its economy. Therefore, China’s outward FDI policies towards Nepal are in line with its national energy security agenda. Furthermore, Nepal – a reservoir of unexplored natural resources is of major importance to China which is already facing acute shortages in minerals. Much like the dollar diplomacy, China has been tactful in negotiating deals with Nepal by offering infrastructure development in return for the right to explore raw materials. For instance, the two countries have already signed a 2.25 million deal to establish petroleum and gas resource exploration centers in Nepal. In addition, China has also pledged to conduct feasibility study of cross-border power grid interconnection between the two countries. Clearly, China’s motivation is to secure alternate destination to fuel its massive manufacturing base in the long run.
China’s political motivation in Nepal is an important factor that drives outward FDI towards south of China. The Free Tibet movement poses a serious threat to China’s national sovereignty, making their presence in Nepal all the more important from a geo-political point of view. With a strong grip in Nepal, China aims to coerce the freedom movement of Tibetan refugees and subdue the voices of those sheltered in India.
Moreover, China is also interested in superseding India’s traditional influence in Nepal. In the recent past, it has been very successful in courting Nepal using soft diplomatic measures by extending aid, grants and scholarships. Furthermore, China has also begun to assist Nepal in executing security and military projects.
Nepal’s open border with India is also viewed by China as a strategic gateway to South Asia. A good relationship with Nepal will make it easier for China to embark on its quest to achieve political and economic dominance over South Asian nations which are mostly underdeveloped and long for foreign assistance. Therefore, China has been enthusiastically involved in promoting cross border connectivity in the region with Nepal falling for the tidbit it may have to offer. Mass investment programs such as Belt and Road and Kerung-Kathmandu railway agreement are also a result of this engagement strategy.
The highly competitive Chinese domestic markets are beginning to saturate and China is in a lookout for newer territories in an attempt to gain first-mover advantage in untapped markets overseas. Nepal is at close proximity to China and Nepal’s rich tourism prospects provide China a perfect spot for business motives. Moreover, India has long dominated business and trade activities in Nepal. Tapping into the Nepali market will prove additional leverage to China, both politically and economically.
Thus, the dramatic rise of China’s FDI to Nepal demonstrates not only China’s active engagement in economic and political affairs with Nepal but also its need to endow China with new markets in order to sustain its own economic growth.
It’s of utmost importance that Nepal recognize China’s investment strategy and negotiate deals accordingly since any form of investment means business to China. Nepal is in dire need of FDI and China is at the doorstep to provide such investment; it may appear to be a perfect match for a country struggling to modernize and catch up with the developing world. However, examples of Chinese investments in Africa and Sri Lanka ring a warning bell when it comes to accepting big infrastructure deals with a state that is exceptionally astute in business matters. In order to minimize risk of a debt trap, it is of primary importance that Nepal negotiates deals with China based on rational terms and conditions of the project. It is essential to seek clarity well in advance regarding repayment mechanism of loans. Furthermore, in order to avoid development crash, stringent conditions that enhance skills and capital of the domestic economy should be adopted by Nepal.