Pakistan tensions loom over India-China Strategic Economic Dialogue

Pakistan may not be officially included in this year's round of talks between India and China, but it's certainly high up on the agenda.

The world's number two economy has so far attempted to remain neutral amid the current geopolitical crisis in Kashmir, where New Delhi and Islamabad have revived a decades-old territorial conflict. But as the fourth annual India-China Strategic Economic Dialogue (SED) begins in New Delhi on Thursday, Beijing could intervene further.

Chinese President Xi Jinping shakes hands with Indian Prime Minister Narendra Modi to the G20 Summit on September 4, 2016 in Hangzhou, China.
Lintao Zhang | Getty Images

China may lean on India to moderate tensions in the disputed Himalayan region, Nicholas Consonery, senior Asia-Pacific director at advisory firm FTI Consulting, told CNBC's "The Rundown."

While Beijing has historically maintained a deeper alliance with Islamabad, the mainland calls itself a close friend to both South Asian nations. In a press conference on Friday, Chinese foreign ministry spokesperson Geng Shuang said his country remained a friendly neighbor to both India and Pakistan and called on the two sides to exercise restraint and avoid further tensions.

The nuclear-armed rivals exchanged more fire across their de-factor border in Kashmir—known as the Line of Control—on Wednesday, after Indian military officials said they conducted "surgical strikes" inside Pakistan-controlled Kashmir last week. Prime Minister Narendra Modi's administration had accused Islamabad of attacking an Indian army base in the conflicted zone last month, but his counterpart Prime Minister Nawaz Sharif has denied the claims.

The India-China dynamic has certainly become testier than before, C. Raja Mohan, Carnegie India director at the Carnegie Endowment for International Peace, said.

There's a sense in New Delhi that China had not been supportive when it cames to India-Pakistan tensions, while China believes Delhi is growing too close to Washington, so it's using Pakistan as leverage, he told CNBC's "Squawk Box Asia."

The geopolitical triangle is further entangled by reports out this week that the Shanghai Stock Exchange is eyeing a 40 percent stake in Pakistan's main bourse.

High speed rail a win-win for India, China: Expert
Geopolitics muddle China's bid for India infrastructure
China vs India: How Asia's giants measure up

As Islamabad becomes a visible negative factor in India-China relations, it's hoped that political differences won't overshadow economic engagement between the two heavyweights, Mohan said.

China and India are strong enough to know that they have no choice to manage their strategic differences as the cost of conflict would be too great to bear, according to FTI's Consonery. With Modi in power, India was now asserting its political and economic clout on the global stage, so Beijing has learnt to engage with a more powerful India than it previously encountered, he explained.

"Clearly, both Xi and Modi are committed nationalists but their relationship will oscillate between cooperative economic elements and competitive strategic elements for the foreseeable future," he said.

On the sidelines of the Group of 20 (G-20) summit last month, both leaders agreed to "respect and accommodate" each other's concerns to avoid "impedance" on conflicting issues, such as the South China Sea and the China-Pakistan Economic Corridor.

Geopolitics aside, the SED will likely see Modi push for greater Chinese investment into India. About 200 Chinese officials and business executives, led by the head of the National Development and Reform Commission Xu Shaoshi, will participate in the SED's five working groups of infrastructure, energy, environment, new and renewable energy, in addition to high technology cooperation.

However, Indian officials reportedly want the infrastructure section to be split into two, allotting one entire group to just the rail sector.

India's railways are a well-known growth industry and more Chinese companies will certainly want exposure to the fast-growing industry. In August, state-run China Railway Rolling Stock Corporation—the mainland's largest high speed train maker—began operations at its $63.4 million joint venture plant in the northern state of Haryana.

—Follow CNBC International on Twitter and Facebook.