China-India bilateral relations
A repeat of the China-India military confrontation on the scale of the 2017 Doklam border standoff appears unlikely.
- Diplomatic dialogue between China and India will reduce the risk of military confrontation. However, India's distrust of Chinese geopolitical influence in South Asia and the latter's continued support for Pakistan is unlikely to change.
- A looming trade conflict and deteriorating US-Russia ties and will hinder India's economic development and its ability to purchase high-tech weapons from Russia.
- Chinese bilateral trade and international investment in India have increased significantly during the past decade. Improved connectivity with India will help to ensure that US-led alliances will not pose a significant threat to China's strategic security.
On 27 and 28 April, Chinese President Xi Jinping and Indian Prime Minister Narendra Modi held an informal bilateral meeting in the central Chinese city of Wuhan, marking the first bilateral meeting between the leaders since the 73-day military escalation along the Doklam plateau in June 2017. The bilateral meeting was reportedly intended to ease relations and to restore communications between the two countries, which have become strained following the Doklam standoff. Although no official announcements or bilateral treaties for regional co-operation resulted from the meeting, several initiatives were mentioned - including a pledge to continue informal dialogue, a joint India-China economic project in Afghanistan, and increased trade and military collaboration.
Significance of the meeting
The leaders' meeting was announced less than one week previously on the 22 April, after Chinese Foreign Minister Wang Yi met with his Indian counterpart Sushma Swaraj. Shortly following this meeting, China's Vice President Wang Qishan - a trusted ally of Xi Jinping - also met with Sushma Swaraj, signalling the extent of both sides' determination to resolve the ongoing tensions.
The development has been well received in both countries, with state-controlled Chinese newspaper China Daily describing it is an "opportunity for strategic communication" to restore trust. Indian media also noted that Modi had intended to meet with Xi since the Doklam military standoff, which had revealed a major gulf in communication between the countries' respective armies that contributed to the unintended military escalation.
The timing of the meeting was probably triggered by increasing trade conflicts involving the United States and an ongoing deterioration in Russia-Western relations. India is likely to be affected by two US actions - tariffs on steel and aluminium imports (India is the 10th largest exporter of these goods to the US), and a possible blockade of arms sales from Russia to India - both of which will compel India to diversify its strategic alliances beyond the US and its allies. A meeting ahead of the Shanghai Cooperation Organisation summit scheduled for mid-June 2018 is probably intended to signal a rebuilding of trust between the Chinese and Indian leaders.
China and India have economic and political interests in repairing ties
The key motivation for India to improve relations with Beijing stems from its need to avoid military escalation with China at its borders. India, whose 2018 defence budget is one-quarter that of China's, is probably less prepared than China for any military confrontation. Furthermore, India's economy is already growing at a faster pace than China's and is expected to have a younger labour force in the longer term; China is India's biggest trading partner, with bilateral trade totalling USD 84 billion in 2017. India also runs a trade deficit with China totalling USD52 billion; although this is small compared with China-US trade of close to USD600 billion, ongoing trade conflicts and potential long-term technological rivalries between China, the US, and European countries (see China: 20 April 2018: Punitive ZTE export ban indicates US-China technological rivalry, increases likelihood of Chinese targeted retaliation against US companies) increase China's interest in promoting new markets in the longer term.
Political distrust likely to remain despite bilateral talks
Although the first bilateral talks between the two heads of state since the Doklam standoff signals a strong intent to stabilise relations, no concrete steps to foster rapprochement were offered following the summit. The main focus is militarily de-escalation and to promote Chinese investment into India, and both countries are likely to remain skeptical of the other's geopolitical positioning in Asia. According to India, China's Belt and Road Initiative (BRI), which holds key investments in all of India's neighbours - including Bangladesh, Nepal, Pakistan, and Sri Lanka - is aimed at shifting this regional sphere of influence towards China from its original axis based on India. Such a shift has defence and economic implications for India, as these countries are increasingly likely to allow China to exploit their resources, such as ports for military bases near India, while preferring trade with China over India.
From a Chinese perspective, Beijing is sceptical of increasing US influence in the Indo-Pacific region through the Quadrilateral Security Dialogue (also known as the Quad, a strategic alliance between Australia, India, Japan, and the US). The Quad is likely to offer alternative investments in the region, positioned to be more prudent than BRI, which has reportedly increased the debt of several investee countries.
Outlook and implications
China and India are expected to maintain substantial military deployments within border areas. An imminent permanent border resolution is unlikely, although the risk of cross-border military escalation remains low. Strategic investment partnerships are unlikely to be pursued in the one-year outlook.
China will probably continue to encourage trade and investment in India. Although significant infrastructure investments involving Chinese state-owned-enterprises will remain rare, there is likely to be an increase in Chinese private enterprises - particularly venture-capital funds, banks, and large technology conglomerates - engaging in long-term investments in areas favoured by Xi's "new era" vision, such as companies involved in artificial intelligence, financial innovation, and electronic commerce.
Nonetheless, India will probably remain sceptical about Chinese economic investment, and is likely to actively prevent Chinese players from crowding out Indian domestic industries. In India's Budget 2018, customs duty on mobile phones and phone parts was increased from 15% to 20%, mainly aimed at reducing the share of Chinese phones in the Indian market. This measure is unlikely to be reversed, primarily in order to promote indigenous production.
Indicators of continued improvement in relations include Chinese positions against alleged Pakistan-sponsored terrorism; this would primarily include Chinese support for the listing of Masood Azhar - chief of militant group Jaish-e-Mohamed operating in Indian Kashmir - as a global terrorist at the United Nations, following its previous decision to drop its opposition to placing Pakistan on the "grey list" of terrorism financing by the intergovernmental Financial Action Task Force. Conversely, close ties with the US and US allies, such as joint investment projects with Quad member countries, would heighten China's threat perception against India.