Trends in Chinese investment in Nepal

While China initially showed limited interest in Nepal’s early economic reforms for business investments, it emerged as the second-largest investor after India from 2012 onwards. During the initial period, Chinese economic engagements with Nepal were dominated by Official Development Assistance (ODA) rather than FDI, with Chinese investments in Nepal remaining under $1bn from 2002 to 2012.

The surge in China’s economic activities in Nepal, particularly as an investment destination, can be attributed to changes in the geopolitical landscape of the Himalayan region and the political transformation in Nepal from monarchy to multiparty democracy in 2008. Contrary to some Western scholars attributing this shift to China’s Western Development Programme (1999) and “Going Out” policy (2000), available information and Chinese investment data suggest that China did not significantly invest in Nepal from 1990 to 2012. China took approximately 12 years to become a major investor in Nepal from its “going out” policy, whereas India achieved a similar status in the 1980s. Notably, during this period, some small Chinese companies invested in Nepal’s food processing (primarily processed beef, pork, and buffalo meat) and agriculture sectors to supply processed foods to construction workers engaged in infrastructure developments in Tibet. China took interest in the hydropower sector around 2010, coinciding with Nepal’s further liberalization of the hydro energy sector for private company investments under the 1992 Electricity Act.   

In the restaurant sector, only 4-5 Chinese restaurants were present in the Thamel area of Kathmandu initially. However, the number of Chinese restaurants in Thamel skyrocketed in 2012, reaching approximately 150 in 2022. It’s worth noting that Nepal was the first South Asian country accorded Approved Destination Status by China in Nov 2001.

Various studies and data from the IBN indicate that Chinese companies have shown interest in investing in services, hydro energy, manufacturing, apparel, and agriculture sectors in Nepal. Sectors like tourism were identified based on low investments and guaranteed high-profit principles, as Chinese investors anticipated a surge in Chinese tourists in the future. In 2013, Chinese tourist arrivals in Nepal crossed the 100,000 mark for the first time. Just before the Covid-19 restrictions, Nepal aimed to attract 2m foreign tourists, including 350,000 Chinese visitors, under the Visit Nepal Year 2020 campaign.

The available sources indicate a consistent surge in Chinese investment commitments in the Nepali market since 2012-2013, witnessing a decline in the fiscal year 2022-2023. The fiscal years 2015-2016 and 2016-2017 marked the peak of Chinese investment commitments, accounting for over 70 percent of Nepal’s total FDI during that period. Officials from the DoI in Nepal noted that initially, Chinese investments were primarily focused on small restaurants but gradually diversified into hydropower and other sectors. The tourism sector received the largest share of Chinese FDI commitments, reaching $125m as of July 2021, followed by other services and the information technology sector.

Private sources indicate that over 1,005 Chinese companies were operating in Nepal as of July 2016, with varying levels of investment, including large, medium, and small enterprises. On average, around 200 Chinese companies entered the Nepali market each year from 2012 to 2016. While most small companies operated with 100 percent investments from China, larger and medium-scale projects typically involved over 60 percent share from Chinese companies and the rest from Nepali partners.

Interestingly, Chinese companies showed limited interest in banking, higher education, and high-value technology-intensive manufacturing projects in Nepal, in contrast to substantial investments made in other countries. While Chinese restaurants and hotels contributed over 10,000 jobs in Nepal and revenue to the Nepali state, their impact on the technology and capital-hungry manufacturing sectors, apart from the cement industry, was relatively minimal.

Major joint venture projects

In Sept 2017, the Investment Board of Nepal facilitated a Project Investment Agreement (PIA) for a joint venture (JV) between Hongshi Cement of China and Shivam Cement Pvt Ltd of Nepal, resulting in the construction of a 12,000 TPD cement project in Nawalparasi district. Hongshi Cement holds a 70 percent share in the project, which started trial production in May 2018, showcasing an efficient implementation process within a year of the PIA.

Following the Hongshi-Shivam Cement JV, another PIA was signed between Huaxin Cement Narayani and the IBN in Beijing in June 2018. This paved the way for the construction of the 3000 TPD Huaxin Cement Narayani Project in Dhading district, with test production beginning in January 2022. Despite successful implementation, a sub-committee formed by the Public Accounts Committee (PAC) of parliament raised concerns about the project not adhering to the terms and conditions outlined in the Environmental Impact Assessment (EIA) report. Issues related to haphazard construction of access roads affecting local irrigation canals were also noted.

In addition to manufacturing, the hydro sector has attracted Chinese FDI, as evidenced by the IBN’s signing of an MoU in January 2020 for a JV with the Power Construction Corporation of China Ltd (PCCCL) and Hydroelectricity Investment and Development Company Ltd. (HIDCL) of Nepal. The MoU pertained to the development of the Tamor Storage Hydroelectric project with an indicative installed capacity of 756 MW in Terhathum and Panchthar districts. However, the project faced a three-year delay, prompting the IBN to seek an explanation from PCCCL in May 2023. Little to no significant progress has been achieved in the project since the signing of the project development agreement in Dec 2022. 

Furthermore, in June 2021, the IBN, chaired by then Nepali Prime Minister KP Sharma Oli, approved a proposed investment of Rs 33.41bn ($280m) for the development of the Lower Manang Marsyangdi Hydroelectric Project with a capacity of 139.2 MW. The project, developed under the build, own, operate, and transfer (BOOT) modality, involved a joint venture between Sichuan Provincial Investment Group Co Ltd, Chengdu Xingcheng Investment Group Co. Ltd, Sichuan Qing Yuan Engineering Consulting Co Ltd, and Nepal’s Butwal Power Company.

Himalaya Airlines, a Nepal-China joint venture in the aviation sector, was established in 2014, representing the largest FDI from China in Nepal's aviation sector. In the realm of Special Economic Zones (SEZs), a Memorandum of Understanding (MoU) was signed in Oct 2019 between Lhasa Economic and Technological Development Zone Jing-Ping Joint Creation Construction Project Development Co Ltd (JPJCCPD) and Damak Clean Industrial Park Pvt Ltd (DCIP) with the assistance of IBN for building the China-Nepal Friendship Industrial Park in Damak, Jhapa district. However, as of the latest update, the project implementation is pending, and the completion deadline has been extended to 2024.

Top 10 priority sectors 

• Services (Hotel, restaurants, telecommunication)
• Manufacturing
• Aviation
• Slaughterhouses
• Packaged drinking water
• Ready-made garments
• Electric vehicle assembly
• Copper mining
• Agriculture
• Hydro energy

 

Major Chinese FDI stock in Nepal

(In Rs, in m)

Source: Field Survey, 2023, published by Nepal Rastra Bank, Nepal

 

An excerpt of the policy brief published by Asian Institute of Diplomacy and International Affairs