China-India Thaw: A Subtle Trade Strategy Signal Traders Can’t Ignore

This month has seen India and China quietly move towards warmer economic engagement, a contrast to their tense past. While longstanding border disputes remain unresolved, both sides have taken small but meaningful steps towards restoring dialogue, resuming direct flights, easing export restrictions on key goods and reopening trade discussions. The shift hasn’t come with much fanfare, but the message to global markets is clear: a subtle change in approach is underway, and it’s one the traders would do well to keep an eye on.

Insights Into India-China Relations

Here is what investors need to know about India-China relations:

Strategic Trade Rebalancing

India’s trade deficit with China surged to a record $99.2 billion in FY24–25, with imports reaching $113.5 billion and exports slipping to $14.3 billion. The imbalance is structurally driven by high-value imports such as electronics, electric vehicle (EV) batteries, solar cells and industrial machinery, which dominate eight major product categories. In contrast, India’s exports remain concentrated in low-value raw materials like iron ore and cotton.

This skewed trade profile reflects deep supply chain dependencies and limited domestic manufacturing competitiveness. As diplomatic ties improve, sectoral rebalancing may emerge in electronics, green tech and machinery, especially if India’s Production Linked Incentive (PLI) schemes succeed in reducing reliance on Chinese components.

China Lifts Key Export Restrictions

Following high-level talks between External Affairs Minister S Jaishankar and Chinese Foreign Minister Wang Yi, China lifted export restrictions on fertilisers, rare earth magnets, and tunnel boring machines on 19 August 2025. These curbs had previously disrupted India’s Rabi season fertiliser supply, stalled infrastructure projects and triggered production slowdowns in the auto and electronics sectors. With shipments already resumed, downstream industries such as mining, construction and EV manufacturing are set to benefit from improved input availability. The easing of curbs signals Beijing’s intent to normalise trade flows and reduce friction, offering tactical relief to sectors previously constrained by material shortages.

Restart of Border Trade

India and China have agreed to reopen cross-border trade through Lipulekh (Uttarakhand), Shipki La (Himachal Pradesh), and Nathu La (Sikkim) following the 24th Special Representatives’ dialogue held in August 2025. These passes had remained closed since 2020 due to the pandemic and border tensions. Nathu La, the busiest route, previously peaked at ₹82.6 crore in trade volume in 2016, while Shipki La and Lipulekh lagged due to poor infrastructure. Their reopening is expected to boost regional trade, especially for border states and logistics firms. The Sikkim government has already proposed a ₹71 lakh trade mart near Shipki La, signalling renewed investment in cross-border commerce.

Paradox of Protection—Break with US Tariffs

On 27 August, 2025, the United States imposed a 50% tariff on Indian exports, citing India’s Russian oil imports, while sparing China from similar penalties. This asymmetric treatment has accelerated India’s pivot towards China, with diplomatic overtures and trade normalisation gaining momentum. Indian exports to the US, valued at $86.5 billion in FY24–25, now face steep losses in the textiles, seafood and gems sectors.

Meanwhile, China remains India’s top import source with $113.5 billion in shipments. Traders should watch for a rerouting of investments from West-facing sectors towards China-linked supply chains, especially in electronics and industrial inputs.

Diplomatic Dance but Soft Trust

Despite recent trade concessions, India-China relations remain fragile. During Wang Yi’s August visit, both nations agreed to form two groups for border delimitation and management, but no resolution was reached on long-standing disputes. Approximately 50,000–60,000 troops remain stationed along the Line of Actual Control (LAC) in eastern Ladakh, underscoring persistent military tensions. While trade and connectivity measures have resumed, including direct flights and visa facilitation, analysts caution against interpreting these moves as full reconciliation. Traders must factor in geopolitical volatility and hedge exposure in sectors vulnerable to sudden policy reversals or border escalations.

Rupee & Currency Signal

The Indian rupee, which touched 85 against the US dollar in December 2024, is projected to weaken further to 87 by end-2025, according to Barclays. However, it continues to outperform Asian peers due to RBI’s neutral policy stance and easing of rupee trade rules.

The central bank’s removal of prior approval for Rupee Vostro Accounts and a reduction in the repo rate to 5.5% have stabilised capital flows amid US tariff shocks. With China showing restraint and India diversifying trade exposure, inward flows may support the rupee and benefit exporters in the information technology (IT), pharma and infrastructure sectors linked to expanding bilateral trade.

Conclusion

What we are witnessing between India and China is a pragmatic recalibration, not a grand strategic shift. It is grounded in economic opportunity rather than ideological alignment. Relaxed export curbs, resumed flights, border trade talks and political outreach collectively present an environment of cautious cooperation. For traders attuned to regional dynamics, these developments suggest shifting risk parameters and potential traction in sectors tethered to India–China links. Ultimately, this thaw is a signal rather than a destination, a change in tone that could shape market flows if it endures.

Source: Articles from the internet

References:

• ET CFO
• News18
• The Economic Times
• The Times of India
• AInvest
• CNBC
• Onmanorama
• Next IAS
• Business Standard
• India Today