Indian Council of World Affairs

Chinese aid has considerably helped close Nepal’s infrastructure gap. However, opaque loan terms, hidden collateral and reports of silence over territorial encroachment in its far west by China raise serious questions about debt dependency and the erosion of its institutional autonomy. Besides, the April 2025 reports of foul play in the China-loaned Pokhara International Airport underscore the country’s growing foothold in strategic infrastructure and the looming risks to its democratic autonomy. 

Introduction

China’s aid to Nepal has rapidly expanded in scale and significance over the past decade, placing it as a central actor in the development of Nepal’s infrastructure, which has evolved into a complex framework of aid, loans, grants and large-scale engineering projects. Photos of billboards adorned with Chinese and Nepali flags visibly proclaiming friendship and shared development have made the headlines recently. On the surface, this display appears to be a benign exhibit of flourishing bilateral relations. China has committed grants worth Rs 12.4 billion to Nepal since 2015.[i] For a country where alternatives are few and Western aid is relatively slow and with the conditionalities of democratic reforms, Chinese aid and infrastructure appear as an immediate and flexible alternative. However, even beneath a more complex story unfolds, one where foreign assistance, cloaked in the language of partnership, becomes a glittering ribbon that ultimately entangles more than it empowers.

The Earthquake and the BRI: A Turning Point

China’s aid relationship with Nepal began symbolically in the 1960s, highlighting goodwill and diplomacy through the Sino-Nepalese Treaty of Peace and Friendship signed in April of 1960, followed by the Sino-Nepalese border agreement in March of 1961[ii].This relationship was further solidified by Nepal's steadfast commitment to the "One China" policy, which asserts that it will not permit its territory to be used for any hostile activities against China."[iii]. This was followed by China’s commitment to develop the Lhasa-Kathmandu highway, the Kathmandu Ring Road and other development projects up until the 1970s.[iv] The 1980s marked the initiation of formal military cooperation, with China supplying military equipment in 1988 and then in 2005 amidst the Maoist insurgency when China assisted Nepal with about $1 million in weapons and ammunition.[v] 

In the early 2000s, most of China’s assistance took the form of grants and loans as a part of its diversification in education, technical training and military assistance.[vi] Investments and funding were directed towards visible infrastructure in the manufacturing, services, and tourism sectors, making such aid particularly valuable given Nepal’s underdeveloped infrastructure.

It was in 2015, when a devastating earthquake, the promulgation of Nepal’s new constitution, and a series of events[vii] disrupted its trade with India that contributed to Nepal’s intensified engagementith China, paving the way for Nepal to sign the Transit and Transport Agreement (TTA) with China in 2016.[viii] The March 2016 agreement through which China gave Nepal access to Chinese ports for third-country trade, a critical step given Nepal’s landlocked status, further paved the way for China’s Belt and Road Initiative (BRI), signed 14 months later in 2017. This, along with simultaneous assistance by the Chinese government to provide a grant to the government of Nepal to reconstruct a district hospital in Sindhupalchok[ix] and the Nepal Armed Police Force Academy,[x] shifted China’s involvement from peripheral support to active engagement, especially with the signing of nine projects for connectivity and infrastructure under BRI.

The Hidden Costs of Lending

Unlike traditional Western aid, particularly from OECD countries that are subject to transparent norms and public reporting through the Development Assistance Committee (DAC), Chinese aid exists in a relatively opaque space. It does not classify as Official Development Assistance (ODA)[xi], allowing China to silently sidestep international scrutiny.[xii] For Nepal, this is presented as a highly flexible model of grants, aid and concessional loans[xiii] with underlying conditions that benefit Beijing far more than they empower Kathmandu.

This necessitates a closer examination of the so-called “no strings attached” narrative by examining the underlying conditionalities of Chinese financing and consequences that follow such engagement.

A recurring feature of Chinese-funded projects is the requirement for them to be implemented using the .[xv] Similar conditions were noted during the Kathmandu-Terai Fast Track project, where, despite the construction being carried out by the Nepal Army, two Chinese companies were also involved..[xvi] In May 2018, China’s Ministry of Commerce, through its Agency for International Economic Cooperation (AIECO), issued an award to China Qiyuan Engineering Corporation for the reconstruction of the Sindhupalchok District Hospital.[xvii] In fact, in a major controversy in May 2017, the cabinet under former PM PK Dahal decided to contract China Gezhouba Group Corporation (CGGC), a blacklisted company by the World Bank, for the construction of the 1200 MW Budhi Gandaki Hydropower Project.[xviii]

Nepali contractors and workers are largely excluded, thus stunting Nepal’s technical capacity[xix] building, making it a case of outsourced development, where dependency is effectively imported. As the CESIF report notes, “Chinese contractors are mostly engaged in EPC (engineering, procurement and construction) models and generally bring their labour, raw materials and technology, limiting opportunities for Nepali workers and industries”. [xx]This exclusion is frequently justified by the weak institutional and technical capacity within Nepal. Most research has shown that Nepal’s capacity to administer and manage development programmes has been another cause for concern and why Chinese firms prefer the EPC model. Further, governance-related deficiencies, such as weak monitoring mechanisms, bureaucracy, the absence of accountability and a lack of good technical capacity plague Nepal’s infrastructure institutions.[xxi]

This dynamic reinforces a structural dependency, as Chinese firms dominate project execution without involving or strengthening Nepali human capital. Nepal risks not only missing out on employment generation but also on long-term capability building, despite the other initiatives taken up for technical and vocational training. Over time, this does deepen Nepal’s reliance on external actors for even basic infrastructure delivery. Moreover, these projects prominently display Chinese involvement, either through signboards and Chinese-language plaques or ribbon-cutting ceremonies. The optics are clear: Chinese aid buys not just roads and airports, but also visibility and narrative control.

A significant research study conducted by AidData[1] revealed that Chinese lenders somehow secure repayment, even when investing in private companies. This is achieved by requiring borrowing countries to deposit their export earnings or other funds into special accounts at Chinese banks 89% of the time.[xxii]

While Nepal’s exact loan terms with China are not always public, this lending model raises serious questions, especially in projects like the Pokhara International Airport, built with a Chinese commercial loan under opaque conditions. Reports by AidData have shown that similar collateral mechanisms are in place, indicating that the Pokhara International Airport project faced months-long delays in early 2017 over an escrow account disagreement. China EXIM Bank insisted that an escrow account be opened into which the Civil Aviation Authority of Nepal (CAAN) would deposit the income generated from all its airports. However, the then Director General of CAAN refused to do so. After intense negotiations, the EXIM Bank issued a letter in April 2017, saying it had amended its earlier condition, allowing CAAN to deposit only those revenues generated by Pokhara International Airport into the escrow account.[xxiii]

This shows how Chinese lending practices can challenge Nepal’s fiscal autonomy, as key sources of national revenue are now tied up in opaque repayment arrangements, originally framed as “development initiatives”.

Development on Display: Political Uses of Chinese Aid

For the political elite, the rate of infrastructure development makes Chinese aid a valuable tool for asserting political legitimacy and re-election. In a country where economic stagnation and political instability dominate the public imagination, only large-scale infrastructure can be used as a trophy of development. Nepal’s politicians, particularly during election cycles, use these projects to show progress and promise prosperity.[xxiv] The Pokhara International Airport, built in 2023, was both built and constructed with a $216 million Chinese loan under the Exim Bank of China and constructed by China CAMC Engineering. It was widely promoted during campaign rallies as a symbol of progress.

More recently, reports show how this growing reliance on Chinese financing is beginning to influence Nepal’s foreign policy behaviour. In Nepal’s far west border region of Humla, reports emerged in recent years about Chinese infrastructure encroaching into Nepalese territory.[xxv] Rather than confront Beijing or even raise the issue publicly, Kathmandu downplayed the incident and refrained from making official recognition. This muted response is no accident and reflects a quiet recalibration of priorities.

The fundamental question here is if Nepal can benefit from Chinese aid without compromising its political independence. So far, the evidence suggests otherwise. For instance, in 2019, approximately 50 leaders from the Chinese Communist Party (CCP) trained over 200 leaders from the Nepal Communist Party (NCP) on “Xi Jinping Thought”.[xxvi] Additionally, the Pokhara International Airport, which received funding from the China EXIM Bank, is now being politically leveraged as a symbol of progress. However, the project's stringent loan terms continue to raise concerns.

In April 2025, a parliamentary subcommittee reported massive corruption (approximately NPR 14 billion) and foul play in the construction of the Pokhara Airport just months after its inauguration.[xxvii] Similarly, the lack of transparency in Chinese-funded projects like the Ring Road Expansion and Upper Trishuli 3A Hydropower has had limited parliamentary oversight, with loan agreements that are often pushed away from public or legislative scrutiny.[xxviii] To add to this, the Ministry of Finance (MoF) said that the ministry itself doesn’t have all the data on Chinese small-scale aid and projects, as the ministry doesn’t track aid under off-budget and off-treasury grants.[xxix] These stances of ignorance raise concerns about what goes on behind the scenes of a Chinese-funded project.

Conclusion

Chinese assistance to Nepal comes with impressive infrastructure, but beneath the surface lie hidden costs. Each new project silently deepens Nepal’s dependence, not through force, but through subtle means, such as unclear loan terms and opaque collateral arrangements. This raises concerns over the gradual erosion of Nepal’s fiscal and political autonomy and the potential for this entanglement to turn into economic interdependence. While Chinese aid is visibly transformative, it increasingly locks Nepal into long-term financial obligations. As the repayment burden grows and domestic capacity continues to remain underdeveloped, Nepal risks becoming economically beholden to China, with fewer avenues to independently shape its development trajectory.

*****

*Nayantara Nandini Uppal, Research Intern, Indian Council of World Affairs, New Delhi
Disclaimer: Views expressed are personal. 

Endnotes

[1] ( AidData is an international development research lab, housed at William & Mary's Global Research Institute, Williamsburg Virginia)

[i] MyRepublica. “China Provides Grants Exceeding Rs 12.4 Billion to Nepal over Nine Years.” MyRepublica, January 13, 2025. https://myrepublica.nagariknetwork.com/news/china-provides-grants-exceeding-rs-124-billion-to-nepal-over-nine-years-6784d842da787.html (Accessed July 16, 2025).

[ii] Ministry of Foreign Affairs of the People’s Republic of China. “Treaty Text.” Treaty Database of China, July 18, 2018. https://treaty.mfa.gov.cn/tykfiles/20180718/1531876402103.pdf (Accessed June 20, 2025).

[iii] Ministry of Foreign Affairs of the People’s Republic of China. “China Nepal Belt and Road Cooperation Key Projects.” MFA PRC, June 7, 2024. https://www.fmprc.gov.cn/mfa_eng/gjhdq_665435/2675_665437/2752_663508/2753_663510/202406/t20240607_11411413.html(Accessed June 20, 2025).

[iv] Shivam Shekhawat. “BRI in Nepal: An Appraisal.” ORF Online, n.d. https://www.orfonline.org/research/bri-in-nepal-an-appraisal (Accessed June 21st, 2025).

[v] Al Jazeera. “China Aiding Nepal’s Fight with Maoists,” November 25,

2005. https://www.aljazeera.com/news/2005/11/25/china-aiding-nepals-fight-with-maoists(Accessed July 13, 2025).

[vi] Abanti Bhattacharya. “China’s Inroads into Nepal: India’s Concerns,” IDSA Comments, Manohar Parrikar Institute for Defence Studies and Analyses, May 18, 2009 https://www.idsa.in/publisher/idsa-comments/chinas-inroads-into-nepal-indias-concerns?utm_source=chatgpt.com (Accessed July 15, 2025).

[vii] Shivam Shekhawat. “BRI in Nepal: An Appraisal.” ORF Online, n.d. https://www.orfonline.org/research/bri-in-nepal-an-appraisal (Accessed June 21st, 2025).

[viii] Government of Nepal. “Chinese Assistance in Nepal’s Infrastructure Development,” GIWMSCD, 2024, https://giwmscdnone.gov.np/media/app/public/6/posts/1717144719_11.pdf (Accessed July 16, 2025).

[ix] AidData. “Project 53717.” China–AidData Aid Projects. https://china.aiddata.org/projects/53717/ (Accessed June 30, 2025).

( AidData is an international development research lab, housed at William & Mary's Global Research Institute, Williamsburg Virginia)
[x] AidData. “Chinese Government provides RMB 200 million grant for Nepal Armed Police Force Academy Construction Project”, AidData Aid projects. n.d https://china.aiddata.org/projects/38543/ ( Accessed July 15, 2025).

[xi] Organisation for Economic Co‑operation and Development. China’s Development Co‑operation Review, December 2023. https://www.oecd.org/content/dam/oecd/en/publications/reports/2023/12/china-s-development-co-operation_ea34f6c2/2bbe45d2-en.pdf (Accessed June 30, 2025).

[xii] Overseas Development Institute. “Levelling the Playing Field? OECD Responses to China’s Overseas Finance.” ODI Insights. https://odi.org/en/insights/levelling-the-playing-field-oecd-responses-to-chinas-overseas-finance/ (Accessed June 30, 2025).

[xiii] Ministry of Foreign Affairs, Nepal. “Historical Overview: Nepal–China Relations.” MOFA Nepal (old). https://old.mofa.gov.np/nepal-china-relations/ (Accessed June 25, 2025).

[xiv] Centre for Social Inclusion and Federalism. Stalled Road to North: A Case of BRI in Nepal. CESIF, 2023. https://cesifnepal.org/uploads/attachment/bf09c40a15fe241dd783e0d110e8746f.pdf (Accessed July 11, 2025).

[xv] Centre for Social Inclusion and Federalism, Stalled Road to North: A Case of BRI in Nepal ,CESIF, 2023, https://cesifnepal.org/uploads/attachment/bf09c40a15fe241dd783e0d110e8746f.pdf (Accessed July 13, 2025).

[xvi] Belt and Road Portal. “Cooperation Projects: Nepal.” YiDaiYiLu. https://eng.yidaiyilu.gov.cn/p/173668.html (Accessed July 3, 2025).

[xvii] AidData. “Project 53717.” China–AidData Aid Projects. https://china.aiddata.org/projects/53717/ (Accessed July 13, 2025).

[xviii] Centre for Social Inclusion and Federalism. “Stalled Road to North: A Case of BRI in Nepal”. CESIF, 2023. https://cesifnepal.org/uploads/attachment/bf09c40a15fe241dd783e0d110e8746f.pdf (Accessed July 11, 2025).

[xix] Asian Development Bank. “Nepal: Other Technical Assistance.” ADB Document No. 38176‑015. https://www.adb.org/sites/default/files/linked-documents/38176-015-nep-oth-01.pdf (Accessed July 13, 2025).

[xx] Mulmi, et al. “Chinese Emergence in Nepal’s Infrastructure: Status, Issues and Challenges”. Centre for Social Inclusion and Federalism (CESIF), 2023, cesifnepal.org/uploads/attachment/4cc7c842a1f9a076c9092aa24cbbde18.pdf.

[xxi] Ibid.

[xxii] AidData. “Chinese Lenders Secure Repayment from Emerging Economies with Cash Collateral.” AidData Blog. https://www.aiddata.org/blog/chinese-lenders-secure-repayment-from-emerging-economies-with-cash-collateral(Accessed July 8, 2025).

[xxiii] AidData. “Project 38411.” China–AidData Aid Projects. https://china.aiddata.org/projects/38411/ (Accessed June 25, 2025).

[xxiv] Mulmi, et al. “Chinese Emergence in Nepal’s Infrastructure: Status, Issues and Challenges”. Centre for Social Inclusion and Federalism (CESIF), 2023, cesifnepal.org/uploads/attachment/4cc7c842a1f9a076c9092aa24cbbde18.pdf.

[xxv] Gautam, Rajendra. “Study Panel Says There Are Issues Along Nepal–China Border in Humla.” The Kathmandu Post, October 23, 2021. https://kathmandupost.com/national/2021/10/23/study-panel-says-there-are-issues-along-nepal-china-border-in-humla (Accessed July 9, 2025).

[xxvi] Anil Giri, “A Blueprint for Consolidating Power: China Exports Xi Jinping Thought to Nepal,” The Kathmandu Post, September 24, 2019, https://kathmandupost.com/national/2019/09/24/a-blueprint-for-consolidating-power-china-exports-xi-jinping-thought-to-nepal (Accessed July 12, 2025).

[xxvii] Shrestha, Ramesh. “Billions Embezzled in Pokhara Airport Works, Probe Finds.” The Kathmandu Post, April 18, 2025. https://kathmandupost.com/national/2025/04/18/billions-embezzled-in-pokhara-airport-works-probe-finds (Accessed July 9, 2025).

[xxviii] Lekhanath Pandey. “Nepal Looks to Kick‑Start Stalled China‑Funded Projects.” DW News https://www.dw.com/en/nepal-looks-to-kick-start-stalled-china-funded-projects/a-70935412 (Accessed July 9, 2025).

[xxix] Centre for Social Inclusion and Federalism. “Dynamics of Small-Scale Foreign Aid in Nepal’s Borderlands”. CESIF, 2023. https://cesifnepal.org/1698922605_Dynamics%20of%20Small-Scale%20Foreign%20-%20Aid%20in%20Nepal's%20Borderlands.pdf (Accessed July 13, 2025).