Background

Early interactions between Nepal and China date to the fourth century, when the Chinese monk Fa Xian visited Kapilvastu, present-day Lumbini in Nepal. Fa Xian’s travel records are considered the earliest reliable written accounts of a Chinese visitor to Nepal, making them crucial for modern scholars to reconstruct the historical relationship between the two states. This account has become one of the most frequently cited and politically instrumental historical references, employed by modern states to articulate narratives of longstanding friendship and civilisational linkages.

For approximately 30 years after the turn of the twentieth century, the Chinese Government regarded Nepal as little more than a former vassal state that had lost its allegiance to China. Meanwhile, Nepal under the autocratic rule of the Rana family—the hereditary prime ministers—maintained a strategic distance from China, focusing primarily on their relations with British India. However, the two states engaged in various diplomatic exchanges and navigated potential military conflicts, many of which centred on the security of Tibet and the borderlands. In the 1940s, the Republic of China attempted to establish formal state-to-state relations with Nepal but did not follow through to avoid infringing upon the geopolitical interests of Britain—a wartime ally of China.

It was not until 1955—six years after the Chinese Communist Party came to power and four years after Nepal’s monarch reclaimed the throne from the Rana family—that the two states formalised diplomatic relations. This shift can be contextualised within broader postcolonial movements in Asia, during which newly independent Asian nation-states sought to establish diplomatic relations with one another. More specifically, following Britain’s withdrawal from the South Asian Subcontinent, Nepal urgently sought to engage China to counterbalance its asymmetrical power relationship with India. This strategic interest aligned with the People’s Republic of China’s (PRC) objective of securing stability along its southwestern borders by fostering diplomatic ties rather than adversarial relations in the region.

During the Cold War, Nepal and the PRC developed a complex friendship marked by state visits, cultural exchanges, treaty signings, and aid projects, leading to unprecedented stability and closeness in their interactions. Both governments supported each other’s core interests. Beijing backed the Nepali monarchy, while Kathmandu helped secure the Tibetan border. Although Nepal became a haven for Tibetan refugees after 1959, and the United States Central Intelligence Agency used Nepal for Tibetan guerilla operations, it maintained its alignment with China’s interests by formally recognising Tibet as part of China, peacefully settling its border with Beijing, and gradually restricting Tibetan political activities within its territory. In return, China provided substantial aid for Nepal’s development projects, including sending engineers and other experts, and financial resources. Socially, the construction sites where Chinese aid projects were implemented were framed as symbols of friendship, characterised by close working relationships between Nepali and Chinese personnel. Chinese experts were remembered for their willingness to work closely and on equal footing with their Nepali counterparts, in stark contrast to those from the West, who were seen as distant or aloof.

Bilateral relations during this era were not devoid of challenges. The Nepali kings did not adhere to the Rana family’s foreign policies, which focused on the British Empire and colonial administration. Rather, they navigated regional and global dynamics—through the Cold War, the Non-Aligned Movement, and conflicts between China and India—by adopting foreign policies to ensure state independence. For example, King Mahendra (r. 1955–72) pursued a non-aligned diplomatic stance, while King Birendra (r. 1972–2001) promoted Nepal as a ‘zone of peace’. The kings were wary of the spread of communism, particularly Maoism, from China, especially through Chinese cultural media and construction sites.

In the 1980s, Nepal–China relations underwent a significant transformation. Following the end of the Cultural Revolution and the beginning of China’s market reforms in the late 1970s, China began investing in Nepal in 1981. By 2010, China had become one of Nepal’s top three sources of foreign investment (with the exception of 2007–08), and, in recent years, it has remained the largest investor—a position strengthened by extensive post-disaster reconstruction and infrastructure projects after Nepal’s 2015 earthquake. Politically, Nepal experienced profound shifts from the Jana Andolan (People’s Movement) of the 1990s, which demanded democratic reforms, to a decade-long civil war (1996–2006) between Maoists and the monarchy.

Despite the country’s internal political transformation, China maintained a cooperative relationship with Nepal’s ruling administration. During Nepal’s civil war, China supported the monarchy—for instance, by supplying arms in 2005—while distancing itself from the Maoists, despite the latter’s ideological connection to Mao Zedong. With the abolition of the monarchy in 2008 and the Maoists’ rise in parliament, China began strengthening ties with the new government and other political parties.

The past decade has witnessed unprecedented developments in Nepal–China relations. While traditional modes of aid and infrastructure investment continue to expand steadily, the rapid growth of Chinese tourism and substantial investments in Nepal’s tourism sector have introduced new momentum to the countries’ bilateral engagement. China is now Nepal’s second-largest source of foreign tourists, after India. This surge has reshaped Nepal’s socio-cultural landscape, particularly in urban centres. For instance, Thamel, a commercial neighbourhood in Kathmandu historically known as a hub for Western tourists, is increasingly transforming into a Chinatown, reflecting a deepening Chinese presence that is reshaping everyday life in Nepal—likely for the first time in the history of the two nations. Framing and conditioning these evolving dynamics is the Belt and Road Initiative (BRI), which has become a crucial factor in shaping Nepal–China relations within the broader geopolitical and economic landscape.

BRI Status

Nepal officially joined China’s BRI in May 2017, signing the Memorandum of Understanding (MoU) on Cooperation under the Belt and Road Initiative. This agreement offered opportunities for Nepal to participate in BRI-related infrastructure and connectivity projects. Following the MoU, Nepal and China engaged in discussions to identify priority projects. These talks intersected with other bilateral agreements, including the Nepal–China Transit Transport Agreement (2016). During a joint press conference in Beijing in September 2017, foreign ministers from both states announced key agreements to enhance bilateral cooperation under the BRI framework, focusing on four areas: the construction of a cross-border railway, the restoration of two major roads damaged in Nepal’s 2015 earthquake, the development of three land ports along their borders, and increased collaboration in trade, investment, post-earthquake reconstruction, energy, and tourism.

In June 2018, Nepali prime minister K.P. Sharma Oli (in office 2015–16, 2018–21, 2024–25) visited China, where he proposed 35 projects for BRI funding during a meeting with then Chinese premier Li Keqiang. However, China insisted that Nepal reduce the number of projects to a single digit. Consequently, the Nepali Government compiled a list of nine projects for BRI support. In 2019, Nepal’s president Bidya Devi Bhandari (in office 2015–23) attended the Second Belt and Road Forum, leading to the inclusion of the China–Nepal Trans-Himalayan Connectivity Network and the China–Nepal Cross-Border Railway, in addition to the nine projects.

A significant milestone in BRI cooperation occurred in October 2019 during Chinese President Xi Jinping’s state visit to Nepal—the first by a Chinese president in more than 20 years. This event marked the elevation of the bilateral relationship to a Strategic Partnership of Cooperation under the BRI, with the signing of 20 agreements. Following Xi’s visit, the Political Parties’ Joint Consultation Mechanism of the China–Nepal Trans-Himalayan Connectivity Network was established to facilitate project implementation. Both sides agreed to conduct a feasibility study for the Gyirong–Kathmandu cross-border railway, laying a foundation for the project’s initiation. Additionally, both nations reaffirmed their commitment to collaborating on the Kathmandu–Pokhara–Lumbini railway project.

Border closures, supply-chain disruptions, and public health concerns during the Covid-19 pandemic led to labour shortages and halted construction, delaying progress across multiple projects. However, well before the pandemic, BRI projects in Nepal were already facing significant structural and political challenges. One major issue was the ambiguity surrounding financial modalities, particularly the uncertainty between loan-based and grant-based funding schemes. While Nepal has consistently advocated for grants, China has been reluctant to accommodate this preference. Additionally, financial modalities have been a contentious issue within Nepal’s domestic politics. The Nepali Congress, the country’s largest political party, has opposed accepting Chinese financial assistance for BRI projects in the form of commercial loans due to debt-sustainability concerns, instead insisting that such support should come as grants.

Largely for these reasons, nearly eight years after Nepal joined the BRI, few infrastructure projects have materialised. Thus far, the only tangible progress has been a feasibility study for the Nepal section of the China–Nepal Cross-Border Railway conducted by a technical assistance expert group, according to the Chinese Ambassador to Nepal in a 2023 interview. However, as Galen Murton notes, the BRI has functioned as an umbrella, legitimising a range of activities not formally listed as BRI projects—such as China’s vaccine diplomacy in Nepal during the Covid-19 pandemic and various private-sector investments—which collectively facilitated a substantial expansion of Chinese presence and influence in Nepal.

In December 2024, Prime Minister Oli visited Beijing with the primary goal of implementing BRI projects. Nine new agreements were signed, covering cross-border railways, road upgrades, trade and transit facilitation, energy cooperation, digital connectivity, capacity-building and training, agricultural cooperation, tourism promotion, cultural exchanges, and education. The subsequent joint statement underscored both sides’ readiness to sign the ‘Framework for Belt and Road Cooperation’, which was formalised on 5 December 2024, in Beijing. The most significant advancement in this swiftly negotiated framework was the explicit agreement on an aid-financing model. The model here refers to a blended funding arrangement in which infrastructure or development projects under the BRI are financed through a mix of grants and concessional loans rather than purely commercial loans at market rates. It is a compromise between grant-based assistance and pure loan-based investment, designed to reflect Nepal’s preference for less debt burden and China’s preference for return-oriented finance.

However, despite this formal agreement, the future of BRI projects in Nepal remains uncertain. While the framework has been signed, project-specific agreements are still pending, delaying implementation. Moreover, ambiguity persists regarding the precise definition of aid financing—a critical factor that will determine whether these projects ultimately materialise. Both governments have yet to establish a shared interpretation of this financial model, leaving key aspects of the agreement open to contestation.

Although Nepal’s engagement with the BRI has recently regained momentum, the long-term outlook for its projects remains complex. While pandemic-related disruptions are gradually fading, unresolved financing disputes, domestic political challenges, and shifting geopolitical conditions continue to cast uncertainty over the BRI’s future in Nepal.

Current Economic Relations

Trade: Trade between Nepal and China began gaining momentum in the 1980s. In 1981, the two countries signed a broad trade agreement to facilitate commerce, though bilateral trade volume remained relatively modest at the time. Nepal’s exports to China—comprising mainly handicrafts, pashmina shawls, carpets, and some agricultural and herbal products—were small in volume, while imports from China were primarily low-cost consumer goods and basic machinery.

Over the following decades, Nepal–China trade expanded steadily, driven in part by China’s rapid economic growth and Nepal’s increasing demand for a wider range of Chinese goods. By the late 2010s, the total trade volume had grown significantly, making China Nepal’s second-largest trading partner—albeit still behind India. The growth was bolstered by various policy initiatives and frameworks, including the Transit and Transportation Agreement (TTA) signed in 2016, which granted Nepal access to Chinese seaports, as well as multiple MoUs on trade facilitation under the BRI.

Despite this growth, Nepal faces a persistent trade deficit with China. Nepali exports—which remain primarily pashmina, woollen carpets, herbal products, and handicrafts—have not matched the country’s rapidly growing imports. In 2023, bilateral trade between China and Nepal amounted to 1.8 billion USD, a 9.1 per cent increase from the previous year. Chinese exports to Nepal totalled 1.77 billion USD, rising 8.4 per cent, while imports from Nepal were 300 million USD, marking a 59.5 per cent increase. Recent imports from China include electronics, electrical appliances, machinery, construction equipment, textiles, and various consumer goods. Although Nepal and China do not have a comprehensive free-trade agreement, the 1981 Nepal–China Trade Agreement and additional preferential treatments provide tariff concessions for Nepali exports to China on selected items. Nepal’s efforts to expand its export portfolio are ongoing, with initiatives to include more value-added and agricultural products, though these currently represent a small portion of overall exports to China.

The closure of the Himalayan trading points during the pandemic severely affected cross-border trade and the local populace, and it was not until May 2024 that 14 of the 21 border trading points between Nepal and China reopened. However, the long-term viability of these trade routes remains uncertain, hindered by political sensitivities and challenging geographic conditions in the border areas. Despite the symbolic importance of the reopening, many of these routes traverse remote, mountainous, and environmentally fragile terrain that lacks adequate road infrastructure on the Nepali side, making trade irregular and costly. The sustainability of these routes is further constrained by fluctuating diplomatic relations, strict Chinese surveillance linked to Tibet-related security concerns, and the vulnerability of local economies that depend on informal and seasonal trade.

Investment: Chinese foreign direct investment (FDI) in Nepal has steadily increased over the past decade, mirroring the broader growth in Nepal–China economic relations. Despite the small size of Nepal’s investment market compared with those of other South Asian countries, the influx of Chinese capital has gained prominence, particularly since the mid-2010s. According to Nepal’s Department of Industry, the primary governmental body responsible for tracking FDI commitments, China has consistently ranked as the top foreign investor in recent years. As of June 2024, mainland Chinese FDI accounted for approximately 45 per cent of Nepal’s total FDI stock, surpassing that from India, Hong Kong, and other partners. During the 2023–24 fiscal year, China pledged approximately 1.9 billion USD (254.7 billion NPR) in FDI, representing 51.4 per cent of Nepal’s total foreign investment pledges in the fiscal year.

A significant portion of Chinese FDI has been directed towards infrastructure-related ventures, driven by Nepal’s efforts to advance roads, airports, and energy projects. China’s investments are predominantly in the hydropower sector. Moreover, several joint ventures in cement manufacturing have attracted substantial Chinese funding. A notable example is the Hongshi–Shivam Cement project, a partnership between Hongshi Cement of China and Shivam Holdings of Nepal, which has contributed to job creation and increased domestic production capacity in the construction sector. Beyond infrastructure and manufacturing, Chinese investors have shown a growing interest in hospitality and tourism, capitalising on Nepal’s iconic attractions and its rising appeal among Chinese tourists.

Despite this upward trend, some analysts have raised concerns about the gap between pledged commitments and actual disbursements. Although official data indicate strong commitments, the flow of capital may face delays due to administrative hurdles, financing structures, and feasibility constraints in Nepal’s mountainous terrain. Nonetheless, bilateral initiatives under the BRI framework, along with Nepal’s efforts to streamline investment procedures, suggest that Chinese FDI will likely remain a crucial component of Nepal’s external inflows.

Aid: China’s aid relations with Nepal can be traced back to the mid-twentieth century when Nepal sought economic support to spur bikas (‘development’) and modernisation. Nepal emerged as a priority in China’s development cooperation not only for its significance in stabilising China’s southwestern frontier with Tibet, but also because both countries positioned themselves as members of postcolonial, non-aligned, and Global South movements advocating sovereignty and anti-imperial solidarity. Nepal started to receive Chinese aid as early as 1956. Over the decades, Beijing’s development assistance has taken various forms—grants, interest-free loans, and concessional loans—with shifting priorities in response to Nepal’s development goals and China’s broader regional engagement strategies.

A recurring theme in Nepal’s development is the construction and renovation of major infrastructure. Roads and highways, often built under the banner of friendship between the two countries, have been at the forefront. One of the earliest and most emblematic projects was the Arniko Highway, constructed in the 1960s, linking Kathmandu to the Tibetan border, thereby facilitating trade, travel, and cultural exchange. In subsequent years, further roadbuilding and upgrades have facilitated Nepal’s connectivity to China, reflecting both countries’ desire to ensure robust cross-border routes.

Government buildings and public facilities rank similarly high on the list of Chinese aid projects. Over the years, Nepal has benefited from China’s construction of administrative complexes and community centres. Beyond public offices, schools and hospitals built or refurbished with Chinese grants have become important pillars of local communities. The Civil Service Hospital in Kathmandu, for instance, is cited as a testament to China’s aid to Nepal’s healthcare sector.

Beyond brick-and-mortar projects, China’s ‘soft’ assistance has also been prominent. For example, medical teams from China periodically visit Nepal to provide free healthcare services and training to local practitioners. Humanitarian aid has become particularly visible when natural disasters strike. In the aftermath of Nepal’s 2015 earthquake, China quickly dispatched rescue teams, relief materials, and financial support. During the Covid-19 pandemic, the Chinese Government donated medical supplies, dispatched expert teams, and provided vaccines under grant assistance to Nepal as part of its vaccine diplomacy, often in competition with India.

Key Controversies

Controversies surrounding Chinese engagements in Nepal have emerged alongside the growth of large-scale infrastructure projects, concessional loan agreements, and tightening economic ties. These disputes often revolve around labour practices, environmental impacts, land acquisition, and broader questions of debt sustainability. One high-profile case is the West Seti Hydropower Project. Initially envisioned by the Nepali State in 1997, it underwent various ownership and funding changes before a Chinese company, China Three Gorges International, became involved in 2012. Despite the project’s potential to boost Nepal’s power generation capacity, it encountered several challenges, including concerns over financing terms, demands for sovereign guarantees, and the risk of displacing communities. Growing concerns about the project’s overall viability, along with persistent disagreements over financial arrangements, ultimately led to prolonged delays and the withdrawal of the Chinese developer.

The Budhi Gandaki Hydropower Project is another frequently debated project, with its construction contract awarded to the China Gezhouba Group Corporation (CGGC) in 2018. Allegations surfaced about a lack of procedural clarity, particularly regarding competitive bidding and transparency. Critics accused the government of fast-tracking the deal, bypassing standard vetting procedures, and enabling corruption. Additional worries centred on the project’s massive reservoir and the fate of the many households that would be forcibly relocated. Subsequent government changes led to the cancellation of CGGC’s contract, after which Nepal planned to finish the project on its own. This episode underscores the political and regulatory volatility that often accompanies large-scale foreign investments in Nepal.

Environment-related disputes have also emerged around road-building ventures. The expansion of the Kathmandu Ring Road, financed by and constructed with Chinese assistance, sparked frustration among residents who alleged that project delays increased dust and smoke pollution, posing serious health risks and long-term impacts on public wellbeing. Similar controversies have erupted in more remote areas where new roads traversing the challenging Himalayan terrain threaten local ecosystems and encroach on community lands.

Debt sustainability has also become a point of contention as Nepal receives increasing amounts of concessional and interest-free loans from China under the BRI. While these funds have enabled the upgrading of airports, hydropower facilities, and highways, some commentators warn that Nepal risks accumulating an unsustainable debt burden, especially if infrastructure projects fail to generate the forecast economic returns. The Pokhara International Airport, constructed largely through Chinese loans from the Export–Import Bank of China, is frequently cited in public debates. Although the airport was hailed by many as critical for improving air connectivity, sceptics note that if passenger and cargo traffic falls short of projections, Nepal could be left with significant financial liabilities.

Recently, Nepal has been drawn into expanding transnational networks of cybercrime, as a growing number of Chinese cybercriminals relocate from other parts of Southeast Asia. This situation has prompted heightened law enforcement, including a 2019 large-scale operation in which 122 Chinese nationals were arrested in Nepal for suspected cyber scams. The operation, reportedly a joint effort between Nepali and Chinese police, has intensified public debates over China’s extraterritorial jurisdiction and its influence over Nepal’s legal processes.

Beyond large-scale crackdowns, smaller police operations targeting Chinese cyber scams have been ongoing in recent years. Due to increased surveillance and enforcement efforts in Kathmandu, some cybercriminal groups are believed to have shifted their operations to Nepal–India border regions, where the law enforcement presence is weaker. In 2023, the Nepali Government banned TikTok, citing concerns over its misuse in cybercrime. The ban was lifted only after its parent company, ByteDance, agreed to cooperate with Nepali authorities to combat platform-related crimes and implement stricter content regulations.

Key Sources

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Cover Image: Cholatse and Chola Tsho on Everest region, Solukhumbu. Source: Photo Saurav (CC).