Why Xi Jinping Chose Detente With India (For Now)

On Tuesday, China surprised many by announcing an agreement to resolve its four-year military standoff with India, just a day before the BRICS summit kicked off.

Yet, beneath the headlines, it seems Beijing’s mounting economic woes are driving President Xi Jinping to make unexpected concessions.

With growth plunging to 4.6 percent in the third quarter—the lowest in 18 months—China's strongman president finds himself in uncharted waters. The downturn has likely pushed his regime to reassess the icy hostility between the Asian giants.

The economic data paints a picture of a deepening crisis. China's property sector, which once accounted for about 30 per cent of the economy, has been in a slump for three straight years. Meanwhile, the youth unemployment rate surged to 18.8 percent in August.

The most alarming red flag for China’s economy? The 30-year government bond yields are dangerously converging with Japan's, signaling a troubling descent into economic and demographic stagnation.

With the stakes higher than ever, analysts anticipate Xi will navigate a careful middle path, though recognition of the looming crisis has been painfully slow to emerge.

"Xi now recognizes that China’s economy is on the wrong track, and a pragmatic course correction is urgently needed," reports the Financial Times, quoting Andy Rothman, an investment strategist at the Matthews Asia fund.

For years, Xi downplayed the need for stimulus for the world’s second-largest economy, even as property prices tanked and local governments crumbled under the weight of hidden debts.

The IMF estimates local governments are saddled with over 60 trillion yuan ($8.43 trillion) in debt—nearly half of China's GDP—with Goldman Sachs calculating that about 12 trillion yuan of this credit is troubled. Additionally, cash flow from selling land-use rights has dried up due to the property market collapse, worsening the strain.

With the Chinese economy caught in a doom loop, social tensions are beginning to simmer. Reports of violence against local officials, including the murder of a finance department cadre in Hunan province, underscore the rising unrest.

Given that the Chinese Communist Party's legitimacy is closely tied to economic performance, Xi Jinping was ultimately forced to blink.

In late September, the government rolled out its largest monetary stimulus in years—cutting interest rates, propping up the stock market, and pledging bailouts for local governments, bank recapitalization, and funds to help buy millions of unsold apartments.

The infrastructure for this spending spree is still being assembled; the Shanghai Stock Exchange even ran its first sector-wide stress test in a decade to brace for the coming surge in trading.

"Unfortunately, if you want to alleviate a debt problem, you have to throw more debt at it," notes Tao Wang, chief China economist with UBS investment bank. The alternative could be worse—a deflationary spiral similar to Japan's experience. China is already scoring worse than Japan on key metrics of economic stagnation, a comparison that must surely worry Beijing.

It’s against this backdrop that Xi's sudden flexibility on border issues with India, following a four-year standoff from 2020 to 2024, should be viewed. The agreement seeks to restore the status quo ante along the Line of Actual Control (LAC) in Eastern Ladakh to the pre-Galwan face-off position of May 2020.

With domestic challenges mounting, China can't afford military tensions that drain resources and undermine economic recovery. The deal reflects Xi's pragmatic retreat from confrontation to focus on fixing pressing economic problems at home.

When Xi Jinping assumed the Communist Party leadership 11 years ago, he sold his people the "China Dream," promising to make China the world's greatest power. Much has since changed, with on-the-ground evidence suggesting that many are disillusioned, as "runxue," the desire to flee the country, becomes an unsettling trend.

China's current economic downturn appears to be structural, not cyclical, putting Xi Jinping in a high-stakes battle to reverse the tide. His legitimacy hinges on delivering prosperity and achieving his strategic goal of doubling per capita GDP by 2035—a goal that once implied China could surpass the U.S. as the world’s largest economy.

While many agree that Xi’s approach to stimulus has shifted, analysts like Olivia Cheung, co-author of The Political Thought of Xi, view it more as a recalibration to prevent the economy from sliding further into crisis.

For Xi, this may be an expensive lesson, one that has now compelled him to seek détente where he once pursued dominance. However, India must remain vigilant, as the PLA’s actions could still disrupt any fragile peace—there are many slips between the cup and the lip, and only time will tell how this unfolds.