Updated: Mar 7
By Dr. Bama Dev Sigdel
Image Courtesy: Wikimedia Commons
Countries as China, India, and South Korea are the rapidly growing economies of Asia. China and India’s economic growth remained at 6.1 percent each in 2019 and expected to grow 5.8 percent and 7.0 percent respectively for 2020. The International Monetary Fund (IMF) forecasted that the outbreak of Corona Virus at the beginning of 2020 may hurt China on its growth target; also projected it could fall by half of the target 5.8 percent due to slackening of Chinese economy by disease outbreak concentrating on China internally on socio-economic issues. IMF increased China’s growth projection to 8.4 percent in 2021, as effective COVID-19 containment measures attributed to boost the economy’s strong recovery. The US economy was predicted to grow by 6.4 percent in 2021[i] China is a growing power due to the robustness in its economy; the second largest economy in the world. The political and economic policies made by China is making greater impacts in Asian and other regions of the world. Peace and regional hegemony of China is making better relation with South Asian countries by reciprocating its huge trade surpluses through massive investment in infrastructure development, socio-economic needs, aid, and energy exploration in the economies of South Asia. China usually provides these Asian countries with low cost of financial capital. The largest beneficiaries of such economic assistance are Pakistan, Bangladesh, Sri Lanka and Nepal. BRI entails multiple overland routes through South Asian, and South East Asian lanes through the Indian Ocean. China’s South Asian policy is primarily aimed at sustaining its global rise. Beijing is eager to increase its strategic; to grow economic and political influence in the region, to ensure economic development of China’s western regions including Xinjiang and Tibet, to reduce political instability and Jihadist threat in the restrictive Xinjiang region, to curtail India’s growing influence, to reduce the ability of potentially hostile powers like USA and Japan on Chinese interest and to promote economic integration.[ii]
The land of South Asian countries covers 5.1 million square km, which is 11.54 percent of Asian Continent or 3.4 percent of the world land surface area. The population of the region is about one fourth of the world population; the most densely inhabited geographical region in the world. China and rest of Asia have historically enjoyed good cultural and economic relation with each other. For instance, the Han Dynasty had well developed business relation with Jibin (Kasmir) in second Century while formal relation between the region and China grew when the Gupta Dynasty came to power in India in 428 AD. More meaningful socio-cultural exchanges and interactions also started to emerge from the 5th Century AD onwards when Buddhism arrived in China from South Asia[iii]. There was promising trade and cultural ties between China and South Asia via Silk Road: From India to Nepal via Tibet to China. China and South Asian countries are thus bounded by Buddhist tradition, philosophy, values and institutions as well as rich and proxy cultural heritage.
China’s much noted economic progress has also fostered its cultural influence globally, including the South Asian region. The growth in this so-called “Soft-power” has become apparent to South Asia very recently.[iv] A decade ago, people in the region rarely thought about learning Chinese or pursuing higher education in China. Today, interest is seen by increasing number of Confucius Institutes and Chinese government sponsored scholarship and teaching Mandarin (Chinese language) appears to be an attractive way for the young generation in South Asian countries to secure a foreign degree in China.
President Xi Jinping report to the 19th Chinese Communist Party (CCP) Congress in October 2017 seeks to “ensure and improve living standards through sustainable development; it condones market” reform and opening and encourages Chinese enterprises to go out especially along the Silk Road Economic Belt and 21st Century Maritime Silk Road.[v] Xi Jinping asserted, “China is following the path of peaceful development and other countries should do the same”. That is to say, he made it clear that the principle of the path of peaceful development based on cooperation would not be applicable to any countries that were violating China’s ‘core interest’, and would not hesitate to engage in hardline response towards them.[vi]
Despite China’s spectacular economic growth in the last several decades, its leadership seems more preoccupied with strengthening mechanisms of control than it has been arguably since the immediate aftermath of the Tiananmen Square (Beijing) demonstrations of 1989. The array of domestic challenges posed by rapid but unbalanced growth in daunting: providing employment, housing, transportation, and medical services for 10 to 20 million new migrants moving to cities each year. Developing energy sources to fuel, the world’s fastest growing large economy; coping with a demographic challenge that is dramatically reducing the number of able-bodied workers; growing inequality and cooperation; providing an aging population; reversing radiation of the world’s most polluted air and water; and maintaining peace and stability in restrictive areas, to name a few[vii]. The 19th Party Congress of China reaffirmed that the Belt and Road Initiatives (BRI) lies at the heart of Xi’s foreign policy. The BRI is an integrated infrastructure and development scheme made up of the Silk Road Economic Belt, linking China with Europe overland through Central Asia, and the 21th Century Maritime Road, a series of sea routes connecting China to Kenya and Egypt, on the way to Europe[viii]. China’s diplomacy with developing countries, and indeed the heart of its foreign economic policy, is based on an alleged virtuous circle. Beijing touts the idea that its trade, investment and lending produce economic development opportunities for both China and its developing country partners. In turn, China argues, this economic development underpins China’s own social and geo-political stability.[ix] This research paper explores China’s rise and its politico-economic interest in South Asia; its aid, trade and investment relation with South Asia. Furthermore, this paper explains China’s BRI and South Asian countries’ responses and China’s post COVID-19 relation with South Asia.
CHINA’S BRI AND SOUTH ASIAN COUNTRIES
The Belt and Road Initiative refers to the “Silk Road Economic Belt (SREB)” and the “21th Century Maritime Silk Road (MSR)” purposed by Chinese president Xi Jinping in September and October, 2013, respectively. According to China’s White Paper issued in March 2015, the BRI aims to: “Promote the connectivity of with the Asian, European and African Continents and their adjacent seas; establish and strengthen partnerships among the countries along the Belt and Road set up all dimensional, multi-tiered and composite connectivity networks, and realized diversified, independent, balanced and sustainable development in these countries”.[x] BRI seeks to more closely link countries across Eurasia and the India Ocean. China’s policy-oriented banks are providing massive funds to allow Chinese enterprises to operate along the “Belt and Road” axes with further funding provided by the Asian Infrastructure Investment Bank (AIIB). The bank of China has indicated BRI’s aim is to make the Chinese Yuan (RMB) the main trading and investment currency in the 65 countries involved. The BRI has a huge investment, trade, connectivity and infrastructure undertaking involving 64 countries in three Continents and collectively accounting for over 30 percent of the global GDP, 62 percent of the world’s population and 70 percent of known energy reserves.[xi] The official rationale behind BRI is that economic growth can be accelerated through infrastructure development, lower trade barriers, stronger energy connectivity, harmonization of standards and other means. Foreign analysts have discussed a range of more self-interested Chinese economic motives. These includes “employing industrial over capacity in the areas such as steel, aluminum, and cement sustaining gross domestic product growth, which is needed to maintain social stability; providing capital for struggling Chinese national and local state-owned enterprises; developing improvised Chinese inland provinces, such as Xinjiang, Gansu, and Yunnan; and promoting the internationalization of the RMB”[xii].
In recent years, China has sought to rebalance its economy from investment and exports towards consumption. As of now consumption accounts for only 35 percent of the Chinese GDP, in contrast 70 percent in the US. The slowdown in GDP growth has been accompanied by a decline of exports and import growth. A smooth transition of Chinese economy will benefit the global economy in the long run new opportunities could open up for countries with abundant labor to makeup production of some labor-intensive goods, on the other hand, it also provides the countries to export higher value goods to China for consumption. After nearly four decades of rapid growth, China has entered a new normal of slower growth. China’s average economic growth is around 6-7 percent a year.[xiii]
The BRI was further integrated into the China’s national economic blue print. It was designated as the leading program for the new vision of China’s opening up policy outlined in China’s 13th Five-Year Plan (2016-2020). During the government reshuffle in March 2018, a new Ministerial-level agency, the China International Development Cooperation Agency (CIDCA), was established with implementing BRI as one of its goal.[xiv] This development indicates that the BRI was further established as a part of China’s grant plan of global governance and is a key component of China’s efforts to contribute to international development, policy coordination, facilities connectivity, un-impeded trade, financial integration and people to people bound.
China is making development in terms of economy, which favors as well as relies on its neighbor. Due to two reasons, South Asia is important for China. First, China wants stability within its states along with peace in bordering areas. Secondly, China’s interaction with neighboring States is necessary in order to enhance trade.[xv] South Asian states perceive that the joint holding of Belt and Road is not a zero-sum game but a mutually beneficial plan. The implementation of the initiative effectively improves the infrastructure of the countries along the Belt and Road, promotes the facilitation of trade and investment, and improves the industrial competitiveness of these countries.[xvi] South Asia is located at the intersection on the sea and land route under BRI, making it an important area and its countries important partners for the construction of the Belt and Road. The BRI has been accepted by the majority of South Asian countries, and most of them have signed bilateral agreement with China to cooperate under the framework of the initiative.[xvii]
An important goal of China’s foreign policy towards South Asia is to create peace through which it can maintain its economic growth. Like other regions in South Asia; China is using different forums on common issue like ASEAN, SCO and SAARC. On the broader level, major objective of China’s foreign policy is to increase cooperation in all areas especially in economic, military and political dimensions. In China’s foreign policy, friendly relation with the South Asian countries is necessary not only to secure itself from hostile neighbors but also secure its economic and political objectives.
South Asia is in the midst of a quite geo-political shift that threatens its long-standing hegemony in the region. China has sought improved relations with India’s small neighbors in the region that for decades were in Indian sphere of influence. The smaller states now find themselves at the receiving end of substantial Chinese financing for infrastructure development as a part of its Belt and Road Initiatives with China’s economic rise over the last two decades and are recalculating their relationship with India[xviii]. South Asia and South East Asia are vital to China’s interest as the “main axis” of the BRI. Infrastructure in the region is a key to connectivity envisioned by BRI, as evidenced by the fact that the area has experienced the most significant investment for the longest period. However, there has been little financial return on investment, and it is questionable whether China is actually seeking a financial return or simply pursuing geo-political needs.[xix]
NEED OF CHINA’S PRESENCE IN SOUTH ASIA
China intends to grow its economy in sustainable manner in the decades. It needs raw materials to fuel industrial sector; South Asian countries especially India, Bangladesh, Sri Lanka could supply semi-finished goods as well as raw materials to sustain China’s industries; oil, gas, cement, iron, etc., are abundant in South Asia. China would like to expand its relation with South Asia to obtain industrial raw materials needed to run enterprises at home. Besides, South Asia is lucrative market for China; as most of the South Asian economies are growing with the growth of middle consumer class population. China would like to maintain peace in its minority living areas as Tibet, Chengdu, Yugur, Xansi, etc., for the growth of these regions, too. It intends to expand infrastructural as well as development activities in such areas. China needs South Asia’s support to maintain peace in such regions. Furthermore, China intends to lessen either Western or Indian politico-economic influence in majority of South Asian countries. That is why China is pouring its aid and investment in South Asia. There seems to be promising improvement on bilateral trade of China with the most of South Asia countries. South Asia is the third largest trading partner in the region, but the bilateral trade is very un-balanced with import accounting only US $15 billion but exports reaching up to US $96 billion[xx].
In the South Asian context, India being regional power with the global ambition, the discussion of BRI is largely dominated by realistic perspective[xxi]. Growing involvement of China in the Indian Ocean Rim surrounding South Asian countries has been presented as an “encirclement strategy” inciting a deep sense of fear among many Indians. Moreover, the USA considers China’s strong presence in the Indian Ocean as a challenge undeniably.[xxii] As most of the South Asian developing economies are on the path of sustainable development vs poverty lessening efforts, there is dire need of foreign capital, technology, know how so as to have better infrastructure in the years to come to upgrade their existing growth level. The small South Asian countries including Nepal could not deny randomly China’s BRI program; instead, they are urging China this program should be with the tune of South Asian countries’ development priorities. Additionally, the South Asian countries are scared with the conditionality of China’s debt; as they are demanding with China to revisit stringent conditional terms of such loan component under its BRI initiatives.
CHINA-SOUTH ASIA ECONOMIC RELATION REFERENCE TO NEPAL
SOUTH ASIA’S GROWTH AND CHALLENGES
China has aid, trade and investment relation with most of the South Asian countries. It has more trade and investment relation with the single country, India. China has more aid relation particularly with the other small South Asian countries as Sri Lanka, Maldives, Bangladesh, Pakistan, Nepal, etc. If China wants to continue the economic growth, it needs the South Asian markets and strategic attachment with the region. On the other hand, South Asian countries cannot go beyond China as the economic hub. China is the top most economic partner almost all of the South Asian countries.[xxiii] The strategic location of Indian Ocean and rising trend of the economy of the South Asian countries is making the significant relationship between China and South Asian countries that also has been maintained further geographical attachment among them.
Table No. 1 – Real GDP Growth in South AsiaCountries201820192020 (Forecast)Post Covid Projection (2020)Projection 2021Afghanistan188.8.131.52-5.51.0Bangladesh184.108.40.206.61.0Bhutan4.65.07.41.51.8India6.86.06.4-3.23.1Maldives220.127.116.11––Nepal18.104.22.168.82.1Pakistan22.214.171.124-2.6-0.2Sri Lanka126.96.36.199––
Source: WB (2019), Growth in South Asia Slows Down, Rebound Uncertain, Washington D.C; World Bank, Press Release No: SAR/OCT: ICIMOD, (2020), www.icimod.org.himaldoc.
South Asian countries namely Bangladesh, Nepal, India and Maldives experienced more annual GDP growth in 2019; their GDP growth stood at 8.1 percent, 7.1 percent, 6.0 percent and 5.2 percent respectively. The other South Asian countries failed to grow their economy; were Afghanistan, Pakistan and Sri Lanka (Table No.1). Almost of these nations are net importers of commodities. Thus, while many energy hungry nations such as India have efficiently used the recent low-cost oil to stock pile huge inventories of oil for future use, rising energy prices present long term downside risks. Nations like Bangladesh have emerged as a major exporter of textiles products and have benefited from lower price of cotton. At the same time, as most of south Asian countries are not huge importer of finished goods; many are involved in importing raw commodities to manufacture finished goods for exports.[xxiv] Despite South Asia not being integrated into world as much as other regions, it is not isolated from global developments. Unexpected changes in growth in USA, the Euro zone, and China, for example, all have strong implication for the growth in South Asia[xxv]. Some studies highlights on Asia’s march to prosperity will be led by seven countries’ economies, two of them already developed and six are fast growing middle income economies: China, India, Indonesia, Japan, Republic of Korean, Thailand and Malaysia. It is expected that these countries account 45 percent global GDP and 90 percent Asian GDP by 2050.[xxvi] South Asian economies are vulnerable from external shocks as majority of them are liberalized and are on the process of financial deepening vs globalization wave. Ever growing climate change, political instability within the region, governance situation, trade barriers, oil price ups and down, etc., usually hampers on the expected GDP growth for the majority of South Asian countries. The outbreak of COVID-19 will definitely downsize GDP growth target made by World Bank/IMF. Thus, the South Asian countries as Bangladesh, Bhutan, India, Nepal, etc.; will hardly grow as forecasted by the World Bank for 2020 or even beyond 2020. One could expect that the Second Wave of COVID-19 could hit hard India’s economy and its chain effect to other South Asian countries could also be severe. This may retard further growth pace of South Asia even for 2021 and beyond. Furthermore, the global problems of climate change will have far reaching implication for the living standards of the South Asian region’s people, as might changes in the global geo-political alignments-with implications for trade inflows and the flow of capital.[xxvii]
CHINA’S AID RELATION WITH SOUTH ASIA
China’s foreign aid is defined as the net and gross disbursements of foreign aid consisting : (i) grants and interest free loans managed by MOECOM; (ii) grants managed by other departments responsible for foreign aid; (iii) scholarships provided by Ministry of Education to students from other developing countries; (iv) the estimates amount of subsides on concessional loans which is deducted from the total amount of aid; (v) the net and gross disbursements of concessional loans as bilateral foreign aid; and (vi) multilateral foreign aid, which is defined as cumulative amount of expenditure by departments and other relevant organizations with a budget for international organization.[xxviii] China’s foreign aid has been growing, due to going out (Zouchuqu) policy (endorsed in 2000) which has also involved increased “outward investment by Chinese companies, this promotion of trade and export products, service and technologies, overseas exploitation of resources and infrastructure construction by Chinese companies”[xxix]. China’s development discourse keeps faith with its foundational guiding principles embedded in the “Five Principles of Peaceful Co-existence (1955)” and “Eight Principles for Foreign Aid to Developing Countries (1964)”. As President Xi emphasized in his April 2015 to address the Africa-Asia 60th Anniversary Commemoration Summit in Jakarta, China remains committed to principles set out by the 1955 Bandung conference and advancing them further through inter-regional dialogue.[xxx]
China’s aid giving also has to be understood in the context of the country’s ambition to increase the collective strength and voice of developing countries, while at the same time bolstering China’s claim to bring their leader. Speaking at the World Economic Forum in Davos, Switzerland in January 2017, Chinese president Xi Jinping underlined that emerging and developing economies contribute to 80 percent of the growth of global economy[xxxi]. Notably, however, unlike its western counterpart, China’s aid usually comes without any political pre-conditions. As Chinese president Xi Jinping emphasized during his state visit to Tanzania in March 2013 to an applauding audience who saw China as a healthy counter balance to western influence. Currently, the international community especially the western nations and China’s neighbors are watching closely to see whether China will follow a peaceful or increasing assertive foreign policy[xxxii].
Commercial interests began to play role in 1980s with China’s “Reform and Opening up”, when economic modernization and development replaced ideology as the core driver of Chinese domestic and foreign policies. For Chinese aid, it means that is should be mutually beneficial in terms of China’s own economic interests. This idea was further developed in 1990s when Chinese aid was intended to support Chinese companies’ “going out”. China’s foreign aid can also be understood as a reflection of humanitarian and development motives. Through the history of Chinese aid, its officials have continuously maintained that China gives aid in order to help other developing countries to reduce poverty and improve recipient countries’ population’s livelihood[xxxiii].
Chinese official foreign aid to the developing countries in the form of grants and loans rose dramatically as another channel of capital export. China’s total foreign aid expenditure as disbursed directly from its Ministry of Finance rose from US $ 631 million in 2003 to US $ 2.3 billion in 2016. Many of the recipients used their resources to purchase China’s products or hire Chinese companies to undertake various construction and development projects for further boosting Chinese export and foreign investment in the Global South.[xxxiv] A 2017 study of aid data recorded “the known universe of overseas Chinese aid” between 2000 and 2014, totaling US $ 354.4 billion. This includes both traditional aid about US $ 71 billion and low concessional loans about US $ 275 billion. The majority of Chinese aid was not in the form of “traditional aid”- direct grants- but rather intended for commercial projects and loans that were required to be rapid in the future by recipients with interests.[xxxv] China’s share of world official development assistance has also been on the rise. In the period of 2000-14, China was estimated to have provided US $ 354.4 billion official fund mostly to developing economies, compared to US $ 394.6 billion provided by the US during the same period.[xxxvi] The new data shows that Chinese funds set aside to more than 4,300 projects in some 140 countries and territories. The countries that benefit the most of the China’s aid vary geographically. Angola, Pakistan and Russia got the larger chunk of such aid money over the 15 years period.[xxxvii]
Instead of simply offering money, equipment and supplies; China has started to launch a large number of educational training and capacity building projects to help developing countries improve their infrastructure, education and health care. Such foreign aid reflects the responsibility of China as global power. It is within China’s capacity, and not drain on domestic demand.[xxxviii] For period 2000-2017, Aid Data uncovered US $126 billion in committed, implemented or completed project in the South and Central Asian region US $120 billion is in infrastructure investments[xxxix]. For 50 developing countries which have borrowed from China, that debt has increased on average from less than 1 percent of their GDP in 2015, to more than 15 percent in 2017. China has been criticized for saddling many countries with debt through its BRI- a mammoth global infrastructure investment plan to build rail, road, sea and other routes stretching from China to Central Asia, Africa and Europe[xl]. Chinese ODA has often been cast as “conditionality-free” making it seemingly more attracting for developing countries. However, Chinese ODA, according to a study conducted by ‘Aid Data’, is intended for commercial projects and loans that are required to re-pay with interest.[xli] One of the features of Chinese aid is the willingness to fund projects in difficult or risky sectors such as railways or dams as that western government and multilateral leading organizations have avoided[xlii].
Given China’s interest in South Asia, it is not very hard to imagine its preferences in becoming an active member of SAARC. For long time, China has continuously expressed its desire to be fully involved in SAARC but to no avail. Historically, India has not been enthusiastic regarding Chinese participation in SAARC. However, of the late, India had to agree to grant China observer status in the face of immense pressure from other South Asian countries like Sri Lanka, Pakistan, Bangladesh and Nepal. Playing the China card helps smaller states in balancing the enormous influence that India has on the region and SAARC[xliii]. China realizes that the market and resources that India can provide to its economy is incomparable to the rest of the region[xliv]. Access to markets in the South Asian region is an important goal for China. China and South Asian countries, particularly India, do enjoy complementary ties in trade that help development of both sides and continue to do so.
The total bilateral foreign aid to Pakistan, India, Sri Lanka, Nepal and Bangladesh by China in South Asia accounted for 11 percent of the global cumulative pledged assistance and 10 percent of the cumulative delivered assistance between 2001 and 2011. Most aid pledged for South Asia was for infrastructure and financial aid, a striking difference between from other regions, where natural-resources developments dominate the programs. The anomaly is due to South Asia’s limited natural resource deposits.[xlv] In South Asia only Pakistan and Sri Lanka have received some assistance from China but even this remained limited. Most of the China’s ODA goes to countries in Africa and South East Asia.[xlvi] From 2001 to 2011, 17 percent of the China’s global infrastructure assistance was allocated to South Asia. Most of the delivered assistance was designated for telecommunication and general economic development projects, which accounted for more than 50 percent of South Asia’s total delivered aid from China. Among South Asian countries Pakistan was the most prominent China’s aid recipient in the past decade, receiving US $ 66 billion, or 87 percent of the regional total aid. Sri Lanka ran a distance second with US $ 5 billion and Nepal rounded out the top three with US $ 2 billion.
China’s South Asian assertiveness gained momentum in the late 1990s. Since then, it has made investments and established trade links with South Asian smaller economies like Bangladesh, Nepal, Pakistan and Sri Lanka to gain a strategic grip and build diplomatic contours in the region. China has increased flows in the form of loans and aid to the region and has overtaken traditional donors to South Asian countries such as Pakistan, Sri Lanka and Bangladesh.[xlvii] The BRI project in India’s neighborhood has triggered a new round of Sino-Indian rivalry in South Asia and the Indian Ocean region. Although there is a deep geo-political undertone involved, its key character is geo-economic. In recent years, New Delhi has increased its economic engagement through aid, investment, trade and connectivity projects in its neighboring states, ostensibly to counter the Chinese BRI projects[xlviii]. China is seeking to make inroad in Bangladesh. Loan worth over US $ 24 billion to Bangladesh have been signed to help it build power plants, a sea port and railways. Additionally, China plans to finance some 25 projects in Bangladesh including a 1,320-megawatt power plant and is keen to build a deep-sea port[xlix]. China has also signed with Pakistan the largest deal so far US $ 68 billion worth China-Pakistan Economic Corridor, a collection of projects connecting to Pakistan’s Gwadar Port in the Arabian Sea. In the total, China has already spent an estimated US $ 200 billion on such efforts[l].
China values Sri Lanka’s potential as an important low-cost transit point for its shipping and logistics and also from the perspective of the security of its offshore supply chain. Among the completed projects in Sri Lanka are the Norochalai Power Station, the Colombo Airport Express Way, the Colombo International Container Terminals, and the Moragahakanda Project[li]. Sri Lanka has also become an example of how developing countries fall into Chinas “debt trap”. In late December 2017, Sri Lanka handed over its ‘Hambantota’ Port and 15,000 hectors of surrounding land to China on a 99-year lease to pay off US $ 1.1 billion in debt[lii]. From 2000 to 2017, over US $ 12 billion in loans and grants have poured by China, into the deeply-indebted country (Sri Lanka)[liii]. Maldives is another area of Chinese focus, given its strategic location along the sea lakes from the Persian Gulf to the Malacca Straits. China has given the contract to expand the Male International Airport, after a concession to an Indian company was abruptly withdrawn. A Chinese construction firm is building a US $ 280 million bridge linking the Airport to Male[liv].
Nepal-China diplomatic relations was established in 1956 when China introduced its first aid to Nepal and provided INR 60 million. China wanted to be assertive and had sought Nepal’s promise that it would forever maintain its friendly relationship with China and would not undertake any thing detrimental to China’s interest. China intends to support Nepal on the front of socio-economic transformations and remained aloof whatever the regime is; Royal, democratic or the communist[lv]. From 1956 to 2003; China provided Nepal with the economic aid worth US $ 1 billion to launch various projects such as transport, hydropower, agriculture, tourism, industry, service, etc. From 2011 to 2017, a total of US $ 278 million of aid was disbursed by China. China has also provided Nepal with 3 billion RMB (US $ 456 million) of aid for the reconstruction of 25 major projects during the year 2016 to 2018.
Nepal joined China’s BRI in 2017, confessing major bottle neck for Nepal’s low profile of development, Nepal had joined this initiative through it could expect to expand road network along with railways line from its northern border to southern Indian bordering areas. BRI can bring-namely improved infrastructure and greater connectivity to the world for Nepal and other small countries in the region. Increased in trade, investment and movement of people for education, research and as the tourists will grow with the expansion with the road and railway lines in South Asian region. Expansion of economic activities through the connectivity supports Nepal on poverty lessening drive with the creation of newer employment opportunities. These further narrows down prevailing socio-economic dualism in the country too. The Nepali Prime Minister K.P Sharma Oli travelled to China in June of 2018 to sign an agreement worth US $ 2.4 billion on everything from infrastructure and energy projects to post- disaster reconstruction efforts. The highlight of the deals was a bold plan to build an un-imaginary railway line through the Himalayas. The line will link Tibetan border town of Kerong with the capital, Kathmandu, and tourist towns of Pokhara and Lumbini (Buddha’s birthplace).[lvi] Some studies estimate Nepal’s trade could boost by 35 percent to 45 percent when the rail line and other BRI infrastructure projects will complete. Some 2.5 million Chinese tourists could visit Nepal with the provision of railway line under BRI; means Nepal could earn additional foreign currency in the same time. The Chinese government has already conducted a pre-feasibility study on the Kerong-Kathmandu railway system. It is estimated that the 72.25 km line from the Chinese boarder to Kathmandu would cost US $ 2.25 billion. In January 2019, Nepal has proposed nine multi-sector projects, including Kerong-Kathmandu Railways (KKR) line to be constructed under BRI at first; China perhaps wants to first develop Buddhigandaki and Tamor hydro project under BRI.[lvii]
BRI scheme could connect Southern China with South Asia via Nepal where more and more Buddhist sect lives. The chain effects of the movement of the people of South Asian region via rail or road transport facilities on the cultivation of brotherhood, and lessening of conflict. BRI could be boon to lessen un-employment, hunger and poverty for South Asia countries that are connected with this transportation concept in future. It will also facilitate a new alternative transit route for this landlocked Himalayan country. Nepal will have access of both Chinese and European markets with the provision of railway or road under BRI. It will expand the market for Nepali product, industrialization will speed up and one can expect Chinese investment in Nepal, too. Furthermore, the dream of opening up corridors would further facilitate to share rich cultural practices, exchange of educational activities, research and innovation sharing among the people and institutes of China, India, Nepal, Bangladesh, Bhutan, Sri Lanka and others.
CHINA’S TRADE AND INVESTMENT RELATION WITH SOUTH ASIA
China started to experience gradual economic slowdown with domestic capital return dropped considerably with the accumulation of production capacity after decades of rapid development. This forced China to explore external investment opportunities, especially in the countries where China can directly apply its experience in infrastructure and associated heavy industry. Against this backdrop, China eyed its developing neighbors as the new growth engine[lviii]. China’s trade with BRI region reveals that its export trade share with the regions ASEAN, Middle East, South Asia and Russia comes to 12.2 percent, 6.2 percent, 4.15 percent and 1.53 percent, respectively. Similarly, China’s import share with these regions and mentioned countries remained at 11.5 percent, 6.2 percent, 1.0 percent and 2 percent, respectively. This further reveals that South Asia is the third largest trading partner in the region, but the bilateral trade is very un-balanced with import amounting to only $ 15 billion but export reaching up to US $ 96 billion.[lix]
China had 11.37 percent and 13.45 percent trade stake on global total import as export trade scenario in 2018. The figures for the US in 2018 remained at 13.92 percent and 8.98 percent on total global import and export trade while this figure for Germany as 6.69 percent and 8.43 percent stake, respectively on global import and export trade. By 2018, China’s total trade in goods had jumped to US $ 4.6 trillion or 12.4 percent of global trade.[lx] China’s major export trade partners were: USA, Hong Kong, Japan, South Korea, Vietnam, Germany and India in 2019. China’s export to these countries stood at US $ 418.6 billion, US $ 279.6 billion, US $ 143.2 billion, US $ 111 billion, US $ 98 billion, US $ 79.7 billion and US $ 74.9 billion, respectively in 2019.[lxi]
China strengthens its economic integration with the global economy as well as neighboring (South Asia) countries. From the last few years, China has taken various positive steps and initiative to enhance its economic relations with South Asian region[lxii]. China’s total trade with individual South Asian countries is at increasing trend. China’s major trading countries of South Asia are India, Pakistan, Sri Lanka and Bangladesh. Other small countries of South Asia i.e., Bhutan, Maldives, Nepal and Afghanistan have less amount of trade with China. China’s total trade with India increased from US $ 66473.33 million in 2012 to US $ 95509.0 million in 2018. Similarly, China’s total trade with Bangladesh and Sri Lanka was US $ 8449.84 million and US $ 316.30 million, respectively in 2012, which increased up to US $ 18737.48 million and US $ 4576.79 million, respectively in 2018. China had US $ 1997.68 million of worth total trade with Nepal in 2012 which increased up to US $ 1077.37 million in 2018 (see, Table No. 2).
Table No. 2 – China’s Trade Status with South Asian Countries (in US $ Million)YearAfghanistanBangladeshBhutanMaldivesNepalPakistanSri LankaIndia2012469.248449.8415.6276.671997.6812413.65316.3066473.332013337.8510307.4517.4197.832554.1414216.44361.9165402.662014410.9312543.3811.22104.372330.6515998.354041.0770576.112015373.5914711.558.47172.83864.7118916.654562.5671696.582016435.8315171.634.85321.18888.6819147.064561.7770179.472017544.6316044.176.42296.25984.8120084.014390.0384387.692018691.6718737.4812.84397.211077.3719105.404576.7995509.00
Source: NBSC, China Statistical Year Books Various Issues (2011 to 2019), Beijing, National Bureau of Statistics of China, 2020, state.gov.cn.
Table No. 3 – India’s Trade with China (In US $ Million)YearsExport to ChinaIndia’s import from ChinaBalance of Trade with China200911617.8830824.02-19206.14201015482.7043479.76-27997.06201118076.5555313.58-37237.03201213534.8352248.33-38713.45201314829.3151049.01-36219.70201411934.2560413.17-48748.9220159028.3761702.36-52673.99201610171.8961283.03-51111.03201713333.5376380.70-63047.17201818833.3576675.66-57842.31
Source: GOI, (2018), Directorate General of Commercial, Calcutta, Intelligence and Statistics (DGCI&S), and (2019), www.state.gov.cn.
India’s export to China stood at US $ 188833.35 million in 2018 while this figure for import rose up to US $ 76675.66 million in the same year. In 2009, India had trade deficit with China, which was US $ 19206.14 million; this rose up to US $ -57842.31 million in 2018 (See, Table No.3). China is net exporter having continuously trade surplus; on the contrary, India is net importer with an evidence of trade deficit for the last years. China has been mainly been dependent on exports for stimulating growth as compared to India. China mainly exports machinery and equipment, electrical and electronic goods, chemicals, textile and textile articles, mineral products, base metal and articles of base metal, plastic and rubber, ceramic products, glass and glassware, clocks and watches, vegetable products, etc. The major importing products of China from India are: mineral products, base metals, product of chemicals and allied industries, plastic articles, rubber articles textiles, gems, precious metals, machinery and equipment, leather and leather products, foot ware, vegetable products, etc.
Table No. 4- Nepal’s Trade with China (In NRs Thousand)YearsExport to ChinaImport from ChinaBalance of Trade with China2009100869639218203-38209507201012055547434677-47314122201198569352924445-51392522012217674968304882-661281332013297990778568176-7558826920142357281100850570-9849328920152156758117209982-11505322420161809834130241441-12843160720172437744159987082-15754933820182580000214800000-212220000
Source: TPC, (2020) Nepal’s Overseas Trade Statistics Various Annual Issues, Kathmandu (Pulchok), Trade Promotion Centre.
NRs = Nepalese Rupees | US $ 1 = Nepalese rupees 103.000
Nepal-China bilateral trade status depicts that Nepal’s export to China was Nrs 1008.6 million in 2009; it increased up to Nrs 3857.4 million in 2018. By this time, Nepal’s import from China rose up to Nrs 139038.0 million from that of Nrs 39218.2 million. Nepal’s trade deficit with China in 2018 stood at Nrs 135180.6 million from that of Nrs 38209.5 million in 2009. (See, Table No. 4) Despite of having the huge potential market, Nepal failed to export more Nepali commodities to Chinese market over the years. Presently, major exportable items to China are; incense stick, copper/brass utensils, handicrafts, herbs, silver jewelries, tea, coffee, wheat, flour, woolen carpet, etc. Likewise, major import items by Nepal from China are: aluminum products, bags, camera, chemicals, fertilizer, electrical, goods, garlic, ginger, fruits, glass ware, medical equipment, medicine, machineries and parts, stationary, pipes, plywood, raw silk, raw wool, readymade garments, noodles, shoes, smart card, mobile, solar panel, steel rods, battery, toys, transport equipment, video/television and its parts, etc.
The growing trend of trade deficit with China is itself a problem for a developing country like Nepal. Nepal has failed to attract China meaningfully in its development activities such as: establishment of export processing zones, industrial corridors, etc., and there by failed to assure China especially on the construction of North-South Road network along the Nepal-China border region. Besides this, Nepal has never seriously explored the export potential of selected agro-commodities, semi-manufactured goods among others; which could be exported to Chinese market. Nepal has comparative advantages of exporting the commodities as: cereals, vegetables, ghee, cold water fish, fruits, spices, herbs, tea, coffee, etc.; which has demand in Southern parts of China, for instance, Tibet, Chengdu and other neighboring areas.
Table No. 5 – China’s Foreign Direct Investment in South Asian (US $ 10000)YearAfghanistanBangladeshBhutanMaldivesNepalPakistanSri LankaIndiaAsia2016367–––6520518198831020177310––1992215772109193872018233–––1567–475410701310
Source: Compiled from NBSC, China Statistical Year Books (2016 to 2019), Beijing, National Bureau of Statistics of China, 2020, state.gov.cn. –Indicate Not Available.
China’s Overseas Direct Investment (ODI) increased up to US $ 158.3 billion in 2017 from that of US $ 2.7 billion in 2002 in the world. In 2018, China continued to optimize the structure of overseas investment and sustain high quality development. Leasing business services, manufacturing and wholesale and retail sectors have dominated the Chinese overseas investment, indicating that Chinese enterprises are shifting from resources-oriented to technology led overseas investment and building global value chain[lxiii]. China’s ODI in BRI countries has steadily increased both in the absolute value and as a proportion of the country’s total ODI flows. China’s ODI in BRI countries stood at US $ 14.5 billion in 2018; it is less than 1.3 percent of Chinese ODI is in BRI countries, of which nearly 65 percent goes to South-East Asian Countries[lxiv]. China’s FDI in Asia stood to US $ 1070.1 billion in 2018 of which India, Afghanistan and Pakistan have succeeded to host more Chinese’s FDI, i.e., US $ 4.7 billion, US $ 233 million and US $ 67 million, respectively (See, Table No.5). In this year, Nepal had hosted US $ 15 million worth Chinese FDI. The balance of Chinese FDI in Bangladesh at the end of 2017 stood at US $ 330 million and in Sri Lanka at US $ 730 million[lxv]. India only was in 31st position in the list of to destinations for Chinese outward investment from 2014 to 2018. Among the main sectors receiving this investment in the 2014-2018 period were infrastructure, automobiles, energy, real estate and consumer good sectors.[lxvi]
The introduction of BRI, which seeks to enhance connectivity and cooperation among the countries from the Pacific Ocean to the Baltic Sea, which includes plan to significantly enhance Chinese presence in South Asia[lxvii]. It seems that China’s Foreign Direct Investment in Asia and South Asia is growing because of its geographical advantages.
POST COVID-19 AND CHINA’S RELATION WITH SOUTH ASIA
First, the spread out of Corona Virus was found in China and later it reached in most of the nations of the World and it did havoc; decelerated growth, disturbed normal life, increased poverty and un-employment and cultivated chaos in the society. It has also changed the shape of geo-economics in the world. World’s GDP expected to shrink at 3 percent and China’s GDP also projected to grow by just 2 percent in 2020 due to COVID-19 effect[lxviii]. Across the Asia-Pacific region, US $ 2.1 trillion of lost output in projected to mean 23 million people will lose their jobs in 2020. The war on COVID-19 has demonstrated that while the US puts the main responsibilities for the outbreak and mismanagement of the Virus on China’s shoulders; China has proven to be quite eager to play the role of the new provider of global public goods, of which economic reconstruction and medical health stand out[lxix]. As US and Western economies severely hit by Corona Virus and are still engaged on the delivery of health services. Working in vitalizing their corresponding economies through fiscal and monetary stimulus; the blocks will fail to win the heart of developing countries as they will curtail aid or grant components direly needed for such countries’ economy to push forward. But, despite of pandemic effect, China is endeavoring on containing COVID-19 that is prevailing in developing Asia and other countries of the world in contrast. China has hinted that despite short term turbulence may happen on the functioning of BRI projects in the countries of the world adjoined with this. Belt and Road Initiative may experience short-term delays due to COVID-19 pandemic, but its long term momentum will be sustained and even strengthened with multi -billion dollar projects from Latin America to South Asia underway[lxx].
One can guess that China’s trade and investment activities in South Asian countries could be disturbed with the COVID-19 effect. Internal economic activities in South Asian countries have been paralyzed with the continuous lockdown. Industry are closed with the paucity of labor and raw materials; enterprises run with Chinese ventures in South Asian countries are affected by no availability of raw materials supposed to come from abroad and labor paucity and supply side bottlenecks. Similarly, there are likely to be significant problems in the case of other countries too with regard in China as well as the fact that Chinese workers cannot travel. Apart from the fact that Beijing is not likely to send workers for BRI projects in the aftermath of Corona Virus, countries will themselves not be in a position to focus on BRI related projects at least for sometimes.[lxxi] China appears to have prioritized COVID-19 aid to BRI countries, although it has other responsibility to provide demanded materials to US and other countries during this pandemic. This is as exercise in soft power, and it is consistent with the preferred strategy of protecting, rather than expanding, borders through trade relationship.[lxxii] China will seek to share its valuable experiences of battling COVID-19 with BRI countries. One key area of potential is in projects focused on strengthening the health systems of low income countries, even if focused on soft processes rather than hard infrastructure. This would be a potential area where China is likely to publicize its efforts as being a part of BRI[lxxiii].
China originated COVID-19 will have adverse impact on economy and its sub-sectors in Indian and rest on South Asian countries economies. For example, total output will drop up to -4.03 percent; sectoral out of agriculture, natural resources, manufacturing, and service will be at -3.36 percent, -0.84 percent, -3.98 percent and -4.35 percent, respectively for India with COVID-19 effect[lxxiv]. South Asia will experience (except India) -4.14 percent fall on its GDP due to COVID-19 effect. Its agriculture, industry and service sectors will be projected to hit hard. South Asian countries came to consensus to fight against COVID-19 collectively through the establishment of “COVID-19 Emergency Fund”. All South Asian countries have contributed finance on it and made to an aggregate US $ 8 million worth fund.[lxxv] New Delhi is worried about the possibility of China taking advantages of the pandemic, offering loans and putting the South Asian nations’ debt traps-thus posing security threat for India. China already provided a preliminary US $ 500 million concessional loan to Sri-Lanka to help it contain the economic impact of the COVID-19 pandemic[lxxvi]. The lease of the controversial port of Hambantuta to a Chinese majority joint-venture was driven largely by Sri Lanka’s needs for foreign exchange reserves rather than being a debt-for-equity swap, as is often believed[lxxvii]. BRI would continue to shape regional geo-politics with Beijing likely to bring increased focus on this projects to make up the delays and losses due to pandemic crisis. Combination of cooperation competition and concern is likely to mark regional dynamics in continental Southern Asia as COVID-19 diplomacy suggests.[lxxviii]
IMF has projected that despite deceleration trend of economies of USA, China and India in 2020; USA and China’s economic growth will again increase by 4.7 percent and 9.2 percent, respectively in 2021. This indicates with the robust growth will be enormous.[lxxix] Effectiveness on handling COVID pandemic will determine the true picture of the economy of the countries of World. Recovery in the economies of China with the lessening of pandemic effect will again supposed to increase trade, investment and tourists flow in South Asia and China in the years to come. If China considers an ongoing BRI projects in Sri Lanka, Bangladesh, and Pakistan which has been topic of debate because of these South Asian countries are on the verge of debt trap; this will facilitate these countries to move towards economic recovery with less burden of debt. China’s post COVID-19 economic recovery will further facilitate on the flow of Chinese foreign assistance packages along with an effective implementation of proposed pipe line BRI projects in some South Asian countries.
China and India are the most powerful emerging economies of the World. With the opening of Chinese economy 1980’s decades onwards for the rest of the world for investment and other economic activities; China succeeded to grow its economy gradually. Restructuring of China’s economy through the means of policy reform, commitment on globalization, accession on WTO; China in fact succeeded to grow its economy with the assurance of employment and bumper production. China’s stake on world’s GDP rose promisingly with its reform initiatives. Rise of China has changed geo-economics and politics in the world. World shifted from bi-polar to multi-polar with the rise of China; it’s policy and economic activities has been influencing more in Asian region. With the announcement and implementation of BRI; China intends to have economic ties with the developing and developed countries of the world. China eyes South Asian region as a vast and growing market, supplier of raw materials for running its industries and revival of Silk Road via BRI initiatives through which it could strengthen its economy and as the means of influence on polity, economy, etc. With the infrastructure expansion endeavors, China views South Asia strategically pivot to lessen the influence of India and USA; win goodwill of China especially in the small countries of South Asia with aid and investment activities particularly after 1980’s decades onwards.
As most of the South Asian countries are on the path of sustainable development and poverty lessening drive; there is dire need of foreign capital, technology, know how so as to have better infrastructure provision to take off their economies. Thus, the small countries of South Asia have joined on China’s BRI program undermining conditionality. Despite of having potentialities, majority of South Asian countries have failed to develop. They are still relying on foreign aid and other international financial resources so as to meet the growing resource gap. South Asian countries as Bangladesh, Nepal, India, Maldives, and Bhutan experienced satisfactory growth in 2019, due to COVID-19 pandemic impact; all South Asian countries experienced a negative growth in 2020 so far. If South Asian countries fail to curb the ‘Second Wave’ of COVID-19; it may further retard their economies with recession, un-employment, and experiences of severe hardship in 2021.
China has come on the fore front with its bilateral aid since the enlargement of its economic strength. China claims its aid programs a- political, but its assistance to developing countries are found to be economic motivated; attached with its commercial activities and economic interests. China’s assistance to developing countries robustly increased over the decades. The countries that benefit the most of the China’s aid vary geographically. Angola, Pakistan, and Russia were the larger beneficiaries of aid rendered by China. China’s assistance has been mostly concentrated in infrastructure development such as build railroads, dams, roads, etc. The South Asian countries as Pakistan, Sri-Lanka, and Nepal are the major beneficiaries of China’s assistance. Some 17 percent of China’s infrastructural assistance was allocated to South Asia. The BRI a project of China in India’s neighboring countries has triggered a new round of Sino-Indian rivalry in South Asia and the Indian Ocean region. With the enhancement of China’s activities through aid, trade and investment; India has also increased its economic engagement via her aid, trade, investment, etc; in its neighboring South Asian nations. China has blamed that the contract of mega projects in some South Asian countries has created the situation of debt trap for such countries involved due to stringent nature of contracts of the projects which are mostly large and could bear less tangible outcome so far.
South Asia is the third largest trading partner of China in the region, its bilateral export and trade volume stood at US $ 96 billion and US $ 15 billion respectively. China’s major trading individual countries in South Asia are; India, Pakistan, Sri-Lanka and Bangladesh. Other small countries of South Asia namely Bhutan, Maldives, Nepal and Afghanistan have less amount of trade with China. China is net exporter having continuously trade surpluses. On the contrary, India is net importer with ever growing trade deficit with China. China’s FDI in South Asia is going to take shape gradually. It’s FDI in Asia stood at US $ 1070.1 billion in 2018 of which India, Afghanistan and Pakistan have succeeded to host more amount of Chinese FDI, i.e.; US $ 4.7 billion, US $ 233 million and US $ 67 million, respectively in 2018. Nepal had hosted US $ 15 million worth FDI of China in 2018. India is hosting China’s FDI in the sectors as: infrastructure, automobiles, energy, real estate, consumer goods sectors, etc. Due to geographical advantages; China’s FDI in Asia and South Asia is at increasing trend. China intends to expand FDI either to secure markets for its goods and services or desire of having raw materials needed to run China’s naïve industries to run on full swing there by and having mass scale production. By the means of trade and FDI; China intends to sell its latest innovations etc; through which it desires to have more foreign reserves so as to have an affluent economy.
The First Wave of COVID-19 retarded growth pace of each and every country of the world. The emerging economies as India, China were hit hard by the COVID-19; their growth status retarded in 2020. China succeeded to recover from COVID-19 pandemic soon while it took more time to recover for other South Asian countries as India, Bangladesh, Pakistan, Afghanistan, Nepal, etc. China intended to help South Asian nations with the provision of vaccination, health kits, tools, and financial assistance soon after the successful defeat on COVID-19 pandemic. China had provided COVID-19 related health kits to Nepal and other South Asian countries during First Wave of pandemic. China had also provided a preliminary US $ 500 million concessional loan to Sri-Lanka to help it containing the economic impact of the COVID-19 pandemic. Thus, China came on the forefront of economic cooperation with Asian and South Asian countries during the time of pandemic under its COVID-19 diplomacy.
With the effective and sustainable way of handling COVID-19 First and Second Waves; China has become successful to consolidate its internal economy and again expand its trade and investment activities in the world. Even during pandemic, China became premier host country of inward FDI in 2020 in the world. It has been projected that China’s annual GDP will increase up to 9.2 in 2021. Thus, an increase in China’s economic strength will pave the way for the increment in its BRI activities in South Asia especially in small economies. In the meantime, China will also be capable to render more and more amount of assistance to developing and small South Asian countries. Through this, China could succeed to win goodwill from such countries. Presently, India has been severely hit by Second Wave of COVID-19. This may retard her economy for 2021. In such situation, India would not succeed to support much with its small South Asian neighboring countries with more aid packages. Less presence of India in majority of developing countries through aid and investment packages could become an additional opportunity for China to penetrate and influence more in such countries through the means of BRI, assistance or trade/investment activities. If India fails to contain the Second Wave of COVID-19 on time; it would be difficult for her on the front of obtaining satisfactory economic growth and implementation of its proactive foreign economic diplomacy even in its close neighboring countries of South Asia.
(Dr. Bama Dev Sigdel, is a visiting Professor, Economics, People’s Campus Program Director, Centre for Policy Studies and Rural Development (CEPRUD), Kathmandu, Nepal . He can be reached at firstname.lastname@example.org | Dr. Rishav D. Sigdel, is the President of Human Action for Rapid Development (HARD Nepal), Kathmandu, Nepal. He can be reached at email@example.com. The views expressed in the paper are those of the authors and do not reflect the views of C3S.)
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