Elephant-dragon tango: Modi’s visit to China signals improving ties — will the bonhomie last?
News Summary
Indian Prime Minister Narendra Modi's first visit to China in seven years for the Shanghai Cooperation Organization summit in Tianjin, where he is expected to meet President Xi Jinping, signals a potential for "reluctant cooperation" as both nations face tariff pressures from Washington. Despite India's widening trade deficit with China, which reached $99.2 billion in FY2025, and deep-seated suspicions over border disputes and China's close ties with Pakistan, economic realities are pushing them towards finding common ground. India's "China Plus One" strategy is hampered by its high reliance on Chinese raw materials and intermediate goods, particularly in pharmaceutical APIs and EV components. China, facing domestic overproduction and shrinking demand from the U.S. market, seeks access to India's market, with companies like BYD eyeing growth opportunities. Signs of warming ties include the resumption of direct flights, reopening of border trade points, and Indian companies pursuing partnerships with Chinese firms. However, experts remain skeptical about a long-lasting friendship, viewing the current rapprochement as transactional, with enduring suspicions making deep partnership unlikely.
Background
India-China relations have been strained by long-standing border disputes, notably the deadly Galwan Valley clashes in 2020, and India's apprehension over China's close military ties with Pakistan. Economically, India has been striving to curb its widening trade deficit with China while simultaneously pursuing a "China Plus One" strategy to position itself as an alternative manufacturing hub for global supply chain diversification. However, India remains heavily reliant on China for critical raw materials and intermediate goods, particularly in high-growth sectors like electric vehicle (EV) battery components and active pharmaceutical ingredients (APIs). Concurrently, the Trump administration's ongoing tariffs on Chinese goods are driving global supply chain realignments, creating a backdrop for both nations to explore areas of economic common interest.
In-Depth AI Insights
Beyond the surface, what are the deeper strategic motivations behind this India-China engagement? - For India, the primary motivation is pragmatic: to address vulnerabilities in its critical supply chains, securing raw materials and intermediate goods for its manufacturing ambitions (e.g., EVs, pharmaceuticals). It also aims to bolster its regional influence and capitalize on opportunities arising from US-China trade tensions, without fully alienating its US allies. - For China, facing US tariffs and domestic economic rebalancing, India offers a massive, relatively untapped market to absorb its excess capacity, particularly in EVs and electronics. Limited cooperation with India can also subtly complicate US efforts to contain China in the Indo-Pacific. How sustainable is this 'reluctant cooperation' given the ingrained suspicions and geopolitical fault lines between the two nations? - This cooperation is highly fragile and transactional, rather than strategic. Historical border conflicts, China's alliance with Pakistan, and India's concerns over technology transfer will remain significant impediments. - Sustainability will depend on the precise degree of economic self-interest overlap and the evolution of their respective domestic politics and relationships with the United States. Any significant policy shift or border incident from either side could swiftly reverse this détente. What are the key risks and opportunities for investors deploying capital in Asian emerging markets? - Opportunities: Focus on sectors in India that are highly reliant on key Chinese components (e.g., EVs, pharmaceuticals), which might benefit from more stable supply chains under this pragmatic cooperation. Similarly, Chinese companies expanding into the Indian market (if market access improves) could present new growth avenues. - Risks: Geopolitical risk remains the paramount uncertainty. Investors must be wary of sudden deteriorations in relations, leading to renewed trade barriers, supply chain disruptions, or tightened investment scrutiny. Furthermore, India's own complex business environment and regulatory unpredictability present ongoing challenges.