RISHI GUPTA
The US has suspended its development assistance to Nepal under the Millennium Challenge Corporation. This comes in the backdrop of President Donald Trump’s executive order, ‘Reevaluating and Realigning United States Foreign Aid’, on 20 January 2025—the first day of his second term in office.
Under the MCC programmes, the US had agreed to provide aid for constructing “approximately 300 kilometres of high voltage power lines, equivalent to one-third the length of Nepal, including a link to the Indian border to facilitate electricity trade”, and improving road infrastructure in the Himalayan nation.
In 2017, the US government’s MCC signed a $500 million compact with Nepal. From the beginning, the deal had run into political hiccups, delaying its ratification in the Nepali Parliament by five years. The compact was finally ratified in 2022 after a political upheaval within the ruling alliance—the Nepali Congress, the Communist Party of Nepal-Maoist Centre (CPN-MC)—and opposition from other parties sitting on the other side of the aisle. But there was equal pressure from the country’s northern neighbour, China, which advised Nepal against it.
In its most provocative words, the Chinese state media, Global Times, carried the headline “The US’ MCC pact with Nepal threatens peace and development in South Asia”, tagging the pact as a threat to Nepal’s “sovereignty”. But with the MCC funding frozen now, will China see it as a golden chance to make inroads into Nepal?
China’s opposition to the MCC
In a sharply worded op-ed in Global Times, Li Tao, a professor at China’s Sichuan University, wrote that the MCC pact is a “Trojan horse disguised by Washington as ‘aid’ to Nepal”.
He suggested that by approving the compact, Nepal has changed “neutrality” in the region, and questioned, “Why is the US, along with India, so eager to promote MCC compact in Nepal?”.
This was part of the Chinese narrative focusing on the MCC since Nepal agreed to it in September 2017. China’s panic over the MCC clearly emanated from its own insecurities because Beijing saw it as a direct threat to its ambitious multi-billion Belt and Road Initiative (BRI), which Nepal agreed to join in May 2017—a few months before the US agreed to offer MCC funds to Nepal.
For China, Nepal agreeing to the BRI was a diplomatic victory as Nepal seemed to have defied pressure from India. It was also projected as a celestial weapon shaking India’s traditional influential presence on its next-door neighbour, Nepal. But then came the MCC.
Chinese media was all up in arms, warning Nepal of the dangers of the MCC pact as it would place the US as an influencing actor in Nepal. It might pose dangers to peace and tranquillity at the Nepal-Tibet border, especially when the US has in past supported the ‘Free Tibet’ voices in the 1960s and 70s.
The Tibetan Khampas received training and support from the US in Nepal to fight the Communists in Tibet. While the Khampa Rebellion could not sustain and succeed in overthrowing the Communists from Tibet, the presence of the Tibetan refugee population in Nepal continues to cause anxiety in Beijing, as any external support to them may pose a security challenge to China.
However, with BRI, China saw a chance to engage with the ‘New Nepal’, which was politically divided. Parties like the Communist Party of Nepal (Unified Marxist–Leninist), whose nationalism often emanates from their strong anti-India stance, could help Beijing.
Chinese anxieties were further exacerbated after India silently approved the MCC pact. New Delhi had even seen an opportunity in the MCC, as it offered to facilitate cross-border electricity trade between Nepal and India. Also, since the MCC had enough to counter BRI, New Delhi seemed okay with it.
On the other hand, the BRI ran into controversies in Nepal due to its complex financial module—secretive and opaque, which had proven to be troubling examples of a ‘debt trap’ in countries like Sri Lanka.
The BRI is still struggling to move forward in Nepal. During his first official visit to China in December 2024 after beginning his fourth term as Nepal’s Prime Minister, KP Sharma Oli signed an MoU on BRI, agreeing to financial modules and identifying fewer projects. On the contrary, grants worth $43,342,150 under the MCC pact, which is 8.67 per cent of the total sanctioned $500 million, have already been spent on several projects as of September 2024. Most of the money invested in building and installing electricity transmission lines.
The lack of trust in Chinese assistance has been especially unfavourable to China regarding BRI in Nepal, which often comes with stronger and unclear strings attached. Nepal has repeatedly requested that China provide more grants than loans, but Beijing seems unwilling to offer any freebies.
A panicked China had suggested that MCC was part of the American “coercive diplomacy” and that the US had “smeared China as an attempt to achieve its own geostrategic goals by sowing discord and creating a rift between China and Nepal.” On the contrary, the MCC pact, despite initial resistance from the public and political parties in Nepal, was ratified in the Nepali Parliament because the pact deal was made public. The US was quick and comfortable in answering tough questions, like whether the MCC pact was part of the US-led Indo-Pacific Strategy or not—something that China failed to do.
An opportunity for China?
Beijing may have felt relief after the MCC funds for Nepal were suspended. After all, through its media and press responses, it led a strong anti-MCC and anti-US campaign. However, the “trust deficit” remains a major challenge for Beijing. For many China watchers, the overall implication of Trump pausing and reviewing the US aid and assistance programmes would provide an opportunity for Beijing to fill the strategic vacuum by being the new guarantee of assistance and development partnership to those nations.
Meanwhile, in the case of Nepal, to expand its economic and infrastructure influence, China may make initial concessions to at least infuse some life into a stalled BRI in the Himalayan nation. While Kathmandu has key development partners like New Delhi, Tokyo, and London, and multilateral agencies like the UN, WTO, and the European Union, China may aggressively offer funding. It can include large-scale infrastructure investments, including highways, hydropower, and connectivity projects, and deepening Chinese economic influence.
Second, China has historically opposed US influence in Nepal and has cultivated strong ties with different political factions aligning with its interests. With MCC’s suspension, Beijing may work to consolidate its relationships with Nepal’s ruling elite—as it did when Nepal’s ties with India went sour—to ensure policies that may favour Beijing while countering any future US-led initiatives. This may see a push to speed up the execution of the BRI in Nepal.
Third, there is the possibility that Beijing will capitalise on the anti-US sentiment that may come from the freezing of the MCC funding in Nepal. China may increase cultural exchanges, educational scholarships, and media influence to position itself as Nepal’s most reliable partner while shaping public opinion in favour of its long-term strategic goals.
While China can still fill the vacuum left behind by the US on the development partnership front, it will also be crucial for India to redefine its role and reconfigure its strategic goals to align with Nepal’s development requirements.
Rishi Gupta is the Assistant Director of the Asia Society Policy Institute, New Delhi. He writes on the Asia-Pacific affairs, strategic Himalayas, and South Asian geopolitics. He tweets @RishiGupta_JNU. Views are personal.
SOURCE : theprint