Sino-Indian Relations in the Modi-Xi Era

14 February 2017 Associate Professor Jingdong Yuan, FDI Senior Visiting Fellow Download PDF

Key Points

  • Under the Xi-Li leadership, Beijing continues to treat the Sino-Indian relationship as one of its top foreign policy priorities.
  • Economic ties between China and India remain a key positive aspect in bilateral relations with growing Chinese investment in India’s infrastructure to address trade imbalance.
  • New Delhi is wary of China’s growing presence in the Indian Ocean and views Beijing’s economic initiatives, such as OBOR and BCIM, more in geopolitical than purely economic terms.
  • China is becoming more attentive to, but less alarmed by, India’s growing diplomatic activism and its expanding security ties with the US and Asian countries.


The Xi Jinping-Li Keqiang administration set developing and improving Sino-Indian relations as one of its top foreign policy priorities upon assuming office in 2012-13. Premier Li chose India (and Pakistan) to be among his first foreign trips in early 2013; President Xi visited India and met the new Indian Prime Minister Narendra Modi in late 2014. Continuing to build upon a decade-long pragmatism in managing territorial disputes, the Chinese and Indian leaders set their sights on expanding bilateral co-operation ranging from trade and investment, to broader issues such as climate change and development in the global South. Beijing has pledged to expand investment in India as the Modi Government promotes its “Make in India” economic agenda. At the same time, Beijing and New Delhi have endorsed the establishment of the New Development Bank and the Asian Infrastructure Investment Bank (AIIB). China, together with Russia, has welcomed India (and Pakistan) as full members of the Shanghai Co-operation Organisation (SCO).

Despite those positive moves, recent developments have again highlighted the deep distrust between the two countries and cast a shadow over their relations. These include the reported Chinese block of India’s application for membership in the Nuclear Suppliers Group (NSG) and New Delhi’s bid in the United Nations to list Pakistani Jaish-e-Mohammed (JeM) chief Masood Azhar as a terrorist, along with the growing Chinese presence in the Indian Ocean, including the ambitious China-Pakistan Economic Corridor (CPEC), parts of which involve the construction of facilities in and through the Pakistani-controlled areas of Jammu and Kashmir, the disputed territory that is also claimed by India. At the same time, Beijing is also wary of New Delhi’s “Act East” policy, and its growing security partnerships with the United States and other Asian countries such as Japan and Vietnam, with which China has unresolved territorial disputes.


Economic Momentum and Potential

The Xi-Li administration came to power largely inheriting a stable bilateral relationship with India that had been forged by its predecessor (the Hu Jintao-Wen Jiabao government) during 2002-2012. That period witnessed more regular high-level exchanges, including summit meetings between top Chinese and Indian leaders, the expansion of economic ties, especially in bilateral trade, increased co-operation in a range of areas at multilateral levels such as BRICS and SCO, and the introduction of mechanisms for managing territorial disputes and maintaining border stability. The 2003 and 2005 joint declarations, the initiation of the special representatives for border negotiation in 2003, and the Ten Principles announced in 2006 have, by and large, laid the foundation for managing bilateral relations.

The Xi-Li administration continued the momentum by actively expanding and promoting Sino-Indian relations early in office. President Xi met his then Indian counterpart, Prime Minister Manmohan Singh, on the margin of the BRICS summit in March 2013. Premier Li visited India in May 2013, one of the first foreign countries he was to visit in his new role. President Xi made his first official visit to India in September 2014, where he was warmly welcomed by the new Indian Prime Minister Narendra Modi in his home state of Gujarat. Xi returned the hospitality by hosting Modi in Xi’an in May 2015. Expanding economic co-operation has been a key bilateral agenda.

When he was the Chief Minister of Gujarat, Modi visited China several times. Modi has spoken of his vision of making his home state into India’s version of Guangdong, which, since the beginning of the reforms initiated by former leader Deng Xiaoping, has become one of the most open and prosperous provinces in China. Indeed, Gujarat is one of the most dynamic and open states in India. Transplanting this experience to the Indian federal level requires providing a more open and business-friendly environment and attracting the capital to improve infrastructure. In that context, China can be a critical partner for India. While bilateral trade has grown significantly since the early 1990s, registering a historical high of US$74 billion in 2011, the Indian side has sustained a whopping deficit, which reached $46 billion in 2015. Investing in India and opening up the Chinese market to Indian enterprises therefore become important mechanisms for managing the ever-ballooning Indian trade deficits. It was in just that context that, during Xi’s 2014 visit, US$20 billion worth of Chinese investment in India’s infrastructure was announced. Additional Chinese investment was pledged during Modi’s 2015 visit to China, including the construction of high-speed railways linking major Indian cities.

Complementing the bilateral economic ties with India, China has also been promoting multilateral economic arrangements such as BRICS and BCIM (Bangladesh-China-India-Myanmar), which include both countries. While the former serves as a forum to co-ordinate the economic policies of the emerging markets, Beijing has a greater interest in promoting the latter, given its untapped potential for infrastructure development and commercial opportunities. Indeed, Beijing, in recent years, has taken the initiative to push for greater connectivity to enable future infrastructural developments and economic co-operation at the sub-regional and trans-regional levels, part of its strategy for developing China’s west. Visiting Indonesia in 2013, President Xi proposed the concept of a “Twenty-First Century Maritime Silk Road” that starts at Quanzhou, in Fujian Province, passes through the Strait of Malacca, onto Kolkata and across the northern Indian Ocean, connects to Kenya, and reaches all the way up to Europe. Together with the Silk Road Economic Belt (which Xi proposed during his visit to Kazakhstan, also in 2013), the concept of “One Belt, One Road” represents the ambition of the Xi-Li Government to expand China’s economic co-operation with the countries along the way, which, combined, have a total population of 4.4 billion and US$21 trillion in GDP, respectively 63 per cent and 29 per cent of the global total. In 2013, China’s trade with those countries amounted to more than US$1 trillion, about one-quarter of China’s total foreign trade. Beijing has committed US$40 billion for the Silk Road Fund and has invited India to join that undertaking. The AIIB, which was launched in 2016, aims to support the development of infrastructure in Asia and beyond.

Clearly, economic ties between China and India have continued to expand in recent years, especially after the Xi-Li and Modi Governments came into office. These ties now have the potential to include sub-national and sub-regional interactions. The BCIM Economic Corridor, for example, when fully operational, could inject much-needed energy into India’s north-eastern states and China’s south-western provinces, both landlocked, while at the same time connecting Bangladesh and Myanmar, as well as China and India, to explore the sub-region’s rich resources, facilitate flows of trade, investment and people-to-people contacts, and turn it into an important intersection in the One Road, One Belt initiative. The transportation connectivity will greatly reduce the time and cost of doing business between the two countries and assist development in their respective, less developed regions. Meanwhile, Indian states and Chinese provinces are also beginning to explore areas of co-operation, in particular where the latter could provide financial resources to assist infrastructure development and form economic partnerships. Indeed, recent years have seen growing interactions between Indian state chief ministers and Chinese provincial leaders, and the establishment of sister-city arrangements. There is also a proposal for an annual forum of sub-national leaders of the two countries.

China’s Interests and Presence in the Indian Ocean

In recent years, China has ventured beyond its traditional spheres of activities –East and South-East Asia – to the Indian Ocean Region. China’s perspectives on the importance of the Indian Ocean to its economic and security interests have been informed and influenced by three sets of key considerations. First, China’s perceived maritime interests have expanded and now constitute an increasingly crucial component of the country’s overall economic development due to the rising international trade portion of its gross domestic product (GDP) and its growing energy and raw materials imports. Second, Beijing sees a “Malacca Dilemma” in the form of a potential bottleneck or, at a minimum, a node of extreme vulnerability should a hostile state or states seek to block the transits of energy and other resources headed to China and Chinese exports of manufactured goods. Finally, as its dependence on, and stake in access to, maritime traffic continues to rise, China is witnessing an expanding internal debate about whether it is a continental or a maritime power and, to the extent that it is the latter, about how a balance can be struck between asserting China’s maritime rights and interests by developing the necessary naval capabilities to protect them while not causing unnecessary alarm in India.

That is not to say that China has somehow only discovered the vital importance of the Indian Ocean of late. While the 1980s and 1990s witnessed efforts by Beijing to expand and promote its bilateral ties with a number of IOR countries, including through economic assistance and conventional arms sales, it has only been since the early 2000s, however, that China has become increasingly involved in projects in Myanmar, Pakistan and Sri Lanka, among other countries, that appear to be aimed at developing alternative land routes for oil transport should maritime passages be disrupted.

The result has been the creation – or the apparent creation – of a nexus of Chinese geopolitical influence or, possibly, even a military presence, in the Indian Ocean littorals: Hainan Island; Woody Island in the South China Sea; Chittagong in Bangladesh; the 1,200-km pipeline from the port of Sittwe in Myanmar to Kunming in China’s Yunnan Province; the Gwadar Port in Pakistan; a US$1 billion port at Hambantota in Sri Lanka; and the reported (and likely aborted) US$20 billion Kra Isthmus Canal in southern Thailand.

Indeed, China has provided significant aid to Indian Ocean countries in an effort to secure the safe passage of its tanker fleet, which provides more than 80 per cent of China’s oil. After five years of discussion, construction began in 2010 on oil and gas pipelines running from the Myanmar port city of Kyaukpyu to Kunming, thereby providing China’s south-western region with more direct access to Middle Eastern oil. Additionally, the Irrawaddy River waterways have been proposed to link China’s Yunnan Province with Myanmar ports on the Bay of Bengal.

China’s drive towards a greater presence in the Indian Ocean can be best illustrated by its massive investments in infrastructure projects and its ambitious plan to develop an economic corridor connecting the Gwadar Port to China’s north-western autonomous region of Xinjiang, including the upgrading of the 1,300 kilometre Karakoram, or “Friendship” Highway. But it is the ambitious US$46 billion “China-Pakistan Economic Corridor” (CPEC), launched during President Xi’s 2015 visit to Pakistan, that could be the game changer. The driving forces behind this are China’s continued demand for raw materials and resources and the need for secure routes for their transportation to and from the Persian Gulf, through Pakistan and on to western China. These developments have caused Indian suspicions and anxiety. Despite the stable Sino-Indian relationship in recent years, Beijing has, and will continue to maintain, close ties with Islamabad.

Indeed, even as Beijing continues – and hopes – to improve relations with New Delhi, and has adopted a more balanced approach to managing its ties with the two South Asian nemeses, it has nonetheless increased its assistance – economic and security – to Islamabad in recent years. Apart from CPEC, China and Pakistan have been engaged in close co-operation in civilian nuclear programmes, joint fighter aircraft development and anti-ethnic separatist activities, a growing security concern for China. Beijing has also offered diplomatic support to Islamabad at international and multilateral organisations, one example being the alleged Chinese block on India’s effort at the United Nations to name JeM chief Masood Azhar and other groups as terrorist organisations. Another is the reported Chinese role in preventing India from joining the NSG, partly driven by concerns over the impact of India’s admission on Pakistan.

Chinese analysts have readily pointed out that New Delhi’s ambivalence towards, and reluctance to endorse and join, the One Belt, One Road initiative are reflective of Indian suspicions of Beijing’s agenda, sometimes characterised as the economic version of the so-called “string of pearls” project, an alleged Chinese attempt to encircle India. In other words, New Delhi considers the Indian Ocean to be its back yard and the growing Chinese presence is assessed less from economic and more from geopolitical perspectives. This economics-security nexus also explains the fact that New Delhi has yet to decide whether it should join OBOR. On the other hand, Chinese analysts also suggest that India is “the elephant in the room” and its participation in the project could have a positive impact given its predominant position in South Asia. At the same time, it could also be a win for New Delhi, since Indian participation would potentially help it to draw in much-needed investment for its infrastructure, one of the key objectives of One Belt, One Road.

India Rising: Should China Be Concerned?

India has emerged as a major regional power in the Indo-Pacific and harbours global power ambitions. It is uniquely positioned in the Indian Ocean and dominates South Asia. It has maintained a steady and healthy economic growth rate, surpassing that of China in recent years. In purchasing power parity (PPP) terms, it is already the third-largest economy in the world. While there remain significant internal and external obstacles, Chinese analysts point out that India also enjoys many advantages to pursue its great-power dream, from a stable political system, a young working force and rich endowments in natural resources, to its geographic location, market potentials and the changing international environment. An ambitious and resolute leader, Prime Minister Modi’s active diplomacy has gained important partners and expanded his country’s influence.

Without question, the growing India-US ties, in particular since the Clinton Administration but most prominently developed during the George W. Bush presidency, have drawn increasing attention from Chinese analysts. Beijing clearly has been very attentive to the development and evolution of this partnership and, indeed, was quite alarmed at the scope and speed with which New Delhi and Washington embraced each other and moved forward with defence, space and, most significantly, civilian nuclear co-operation. The latter essentially grants de facto nuclear state status to India, an important trapping of great powers. In 2013, India imported US$1.9 billion in military equipment from the United States, compared to only US$237 million in 2009. Beijing perceives this as an attempt by Washington to enlist New Delhi as a potential counterweight, if not part of a containment strategy, against China. The US has clearly recognised the growing importance of India, given the latter’s potential as a major political player and an emerging market, its crucial role in the stability of South Asia, and its potential as a counter force against China.

Chinese debates have focussed on the nature and scope of a growing US-India partnership and how they affect Beijing’s strategic interests in the Indo-Pacific region and its relationship with India. It is clear that palpable concerns and apprehensions existed during 2005-08, when Washington and New Delhi seemed to be in lockstep on many critical regional security issues and, together with other US allies in the region, were knitting networks of alliances and alignments seemingly aimed at containing China’s growing power. In recent years, though, Chinese officials and analyses have displayed more confidence (although caution remains) in India’s independent foreign policy and recognition of the differences in Indian and US priorities and their respective approaches to issues important to Beijing. China will remain in a less favourable but not fatal, or even vulnerable, position in the emerging triangle provided that Beijing can effectively manage its delicate relationships with both New Delhi and Washington. These developments have both influenced and reflected Chinese policy towards India in the past few years.

At the same time, Beijing is also wary of New Delhi’s eastward strategy of developing greater economic and military ties with Japan and the ASEAN countries. The increasingly warm ties between New Delhi and Tokyo reflect a degree of shared interests in their hedge against China’s rising influence. India now has become the largest recipient country of Japanese official development assistance (ODA). Chinese analysts note that New Delhi’s south-east Asian diplomacy could add complexity to China-ASEAN relations. For example, growing Indian and ASEAN naval co-operation could impinge upon China’s maritime interests, making a final resolution of the territorial disputes in the South China Sea even more difficult. Indo-Vietnamese defence co-operation is viewed with suspicion by Beijing, as China has unresolved territorial issues with both countries. In recent years, New Delhi’s eastward strategy has taken the form of closer defence/security co-operation with America’s allies in Asia; Japan and Australia in particular.

Clearly, these issues and the impact that they may have upon Beijing’s security interests and, conversely, how China’s own inroads into the Indian Ocean could affect New Delhi’s threat perceptions, and whether the two countries can manage their overlapping interests and “intrusions” into each other’s spheres of influence, will continue to occupy strategic thinkers in both Beijing and New Delhi.

Despite the early signs of momentum and progress, China-India relations remain both co-operative and competitive. Their territorial disputes have yet to be resolved. China is wary of closer India-US ties while India is concerned by Beijing’s resilient ties with Islamabad and Chinese inroads into the subcontinent and the Indian Ocean Region, areas considered by New Delhi to be its spheres of influence. None of these have fundamentally changed the overall trajectory of a steadily improving bilateral relationship, but they nonetheless display a lack of mutual trust, which, in turn, impedes the deeper, more fruitful co-operation from which both countries can benefit.

About the Author

Professor Yuan is Associate Professor of International Security at the Centre for International Security Studies and Department of Government & International Relations at the School of Social and Political Sciences, University of Sydney. He specialises in Asia-Pacific security, Chinese defence and foreign policy, and global and regional arms control and non-proliferation issues. His latest publication is 'Dragon and Eagle Entangled: Sino-US Military Exchanges, 2001-2016'.
Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

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