Nepal’s new government may recalibrate engagement with China, but structural constraints suggest cautious continuity rather than a fundamental shift in bilateral ties
The events of the past six months in Nepal culminated in the near-total defeat of the established older parties in the elections held on 5 March 2026. Following the elections, Nepal witnessed the swearing-in of Rastriya Swatantra Party’s (RSP) Balendra Shah as the youngest Prime Minister on 27 March. As Kathmandu enters this new phase in its political journey, speculation about how the new government will shape its foreign policy has grown more pronounced. For China, the emergence of a new political force has prompted deliberate restraint, with Beijing adopting a wait-and-watch approach to assess how the situation unfolds and to recalibrate its policy in light of changing circumstances.
The RSP’s rise to the helm has been driven as much by their commitment to break from the status quo as by public frustration with entrenched political elites. Their emphasis on outcome-oriented, checks-based, and accountability-focused governance reflects this demand for change. While significant domestic reforms remain necessary, expectations for how Kathmandu manages its relationships with neighbouring countries remain rooted in long-standing practices and principles—a balanced, non-aligned approach that avoids security or military entanglements while leveraging the growth of both India and China for its own economic development.
The RSP’s election pitch also emphasised Nepal’s reimagination as a ‘bridge’ between India and China, while indicating that it does not intend to initiate any major reset in the country’s foreign policy. According to officials, the focus will be on advancing economic development, with development diplomacy remaining the primary tool of engagement. Nepal’s importance for China has increased over the past few decades, evolving alongside China’s broader approach to South Asia and its growing competition with India. Its geographical location, bordering Tibet, also makes it significant from a security perspective.
After Shah’s swearing-in, China’s Ministry of Foreign Affairs spokesperson congratulated him and underscored the need for both countries to work together. Under the previous Oli-led government, China–Nepal ties were on an optimistic trajectory. In December 2024, Oli signed another framework agreement on the Belt and Road Initiative (BRI) during his visit to China. Since 2017, the BRI has become an important marker of Beijing’s growing influence.
Nepal’s importance for China has increased over the past few decades, evolving alongside China’s broader approach to South Asia and its growing competition with India. Its geographical location, bordering Tibet, also makes it significant from a security perspective.
Of the 35 projects initially shortlisted, only nine made it to the final list. Nearly a decade later, certain points of contention persist, particularly over financing modalities, with Nepal’s aversion to additional loans and China’s reluctance to place all projects under grant assistance. Alongside this, local conditions and frequent changes in government continue to affect implementation. The mountainous terrain, land acquisition challenges, opposition from affected communities, lack of clarity in financial arrangements, and perceptions of preferential treatment for specific locations have all been sources of concern.
In the latest agreement, ten projects were highlighted, with both sides agreeing to determine financing modalities on a case-by-case basis. Nepalese officials viewed this as a win, with China finally agreeing to the terms sought by Kathmandu. Of the ten projects, only the Torkha–Chhare tunnel has seen progress, while both sides are also pushing to complete the Hilsa–Simikot road. These two projects were identified during their January 2026 meeting on border trade cooperation. The feasibility study for the Kerung–Kathmandu railway is expected to be completed by June 2026, while the status of all projects was last reviewed in May 2025.
In 2024, before K.P. Sharma Oli visited Beijing, senior RSP leaders had sought greater clarity on the terms of reference and the agreement's framework. Their recent emphasis has also been on assessing each project individually and determining whether it requires a grant or a loan based on its economic feasibility and potential returns. This signals a degree of continuity with the latest agreement.
Prime Minister Balen Shah’s omission of the China–Nepal Industrial Park, to be developed in Damak, Jhapa, from his election commitments was viewed as a signal—an attempt to exercise caution early in the political cycle. The park’s proximity to Nepal’s southern border with India has been a concern for New Delhi, even though the MoU was signed in 2019 and the foundation stone was laid as far back as 2021 by Oli. The party’s intent to acknowledge India’s security concerns introduces complexities for such projects moving forward.
When the second agreement was signed in 2024, officials involved in the discussions stated that any investment in Nepal would henceforth be channelled through the BRI framework. How this aligns with the RSP’s approach remains unclear. Balen Shah’s earlier positions on certain issues are also seen as reflecting an anti-China inclination. This includes his decision to cancel his 2023 trip to China over ethical concerns about Beijing depicting Nepal’s territory as part of India.
Allegations of corruption in the construction of Pokhara Airport, built with Chinese loans, are also likely to influence how future projects are received. A few days ago, the Commission for the Investigation of Abuse of Authority (CIAA) filed a third case, implicating the airport’s contractor, the Chinese state-owned enterprise CAMC Engineering Ltd., and its officials for allegedly siphoning funds. It has also been alleged that the contractor acted with “malafide intent” to secure the project. This could result in a trust deficit in Chinese investments, particularly since China sought to associate the airport’s inauguration with the BRI in January 2023, despite Nepal’s rejection.
In December 2025, when the first case was filed, the then-Chinese ambassador urged Nepal not to implicate the contractor, describing the case as an external witch-hunt. China has been a dominant actor in Nepal’s infrastructure development, with Chinese contractors securing a majority of projects. For a government elected on a platform of addressing endemic corruption, there will be pressure to act. This could consequently place other Chinese investments under scrutiny or delay the completion of ongoing projects.
In recent years, Nepal’s posture vis-à-vis China’s security and strategic concerns has also seen a gradual hardening, reflected in the shift from the ‘One China policy’ to the ‘One China principle’ in certain communications, the inclusion of the GSI and GCI as part of bilateral cooperation, even as the Nepalese side has only accepted the GDI, and a firmer stance on Tibet, alongside the clubbing of projects predating the signing of the BRI as part of the initiative, among other developments. This space that Beijing has leveraged in recent years could also come under question depending on how the RSP chooses to act.
For Nepal, developing a relationship with China has both economic and strategic dimensions. The deepening of economic ties is also seen as feeding into Kathmandu’s strategic positioning—seeking to reduce reliance on New Delhi and, in turn, hedge its bets between its two neighbours.
For China, fostering ties with political stakeholders in Nepal, particularly political parties, remains an important policy priority. The ideological affinity that the CPC shares with Nepal’s communist parties has enabled deeper engagement and greater access to political actors. This was reflected in the letter sent by the Communist Party of China’s (CPC) Department for External Relations to the Rastriya Swatantra Party’s (RSP) office, extending congratulations on its victory.
China has also involved itself in disputes between political leaders and has not shied away from signalling its preferred actors, often emphasising communist unity. While there has been some engagement between the RSP and the CPC, the absence of a communist actor in the ruling government will have implications for China. Nepali parties have engaged with the CPC through exchanges, visits, and cultural programmes. However, China has also engaged with non-communist actors, some of whom view such engagement as a way to distance themselves from a ‘pro-India’ image. As the RSP is increasingly perceived as ‘less accommodative and more assertive’, the extent of CPC influence over its leadership remains to be seen.
For Nepal, developing a relationship with China has both economic and strategic dimensions. The deepening of economic ties is also seen as feeding into Kathmandu’s strategic positioning—seeking to reduce reliance on New Delhi and, in turn, hedge its bets between its two neighbours. For small states situated between two larger powers, this is often viewed as the more pragmatic approach.
For the new government in Nepal, maintaining a balanced foreign policy posture will be a key priority. Despite its emphasis on prioritising the economic dimension of ties with its neighbours, Nepal’s strategic geography will remain a constant factor, making policy formulation more complex. While Balen Shah’s actions as mayor may offer some indication of his governing style as Prime Minister, his position will be constrained by party structures and the institutional framework of the Prime Minister’s office.
Shivam Shekhawat is a Junior Fellow with the Strategic Studies Programme at the Observer Research Foundation.
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Shivam Shekhawat is a Junior Fellow with ORF’s Strategic Studies Programme. Her research focuses primarily on India’s neighbourhood- particularly tracking the security, political and economic ...
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