Both the countries have declared cease-fire in LOC region in 2003 and observing it up-till now and process of negotiations is under-discussion among there leaders. Although there are un-confirmed reports of cross-border violations but Indian side agrees that it is very much on the decline.
President Pervaiz Musharraf focuses on making a settlement on the Kashmir dispute that satisfies all the three parties involved (Pakistan, India and Kashmir Administration).
But possibility of Chinese intervention can be given attention.
Note that President Pervaiz Musharraf already banned the major Al-mujahedeen party and its co-ordinates that were involved in the Kashmirís proxy war type situation after 9/11 event and pressure from US government. And I personally had not seen any Mujahedeen support fund programs being practiced now in the cities like they used to be before 9/11 (so this confirms the presidentís claims).
Currently two major proposals are being discussed:
a) Declare LOC as permanent border
b) Give Independence to the disputed zone (might include Pakistani controlled region also)
For under-standing this dispute it is also important to note following things that date back to pre-partition stage:
The British rulers decided to partition the sub-continent on the basis of majority of population of any religion in a province, like a province with Muslims as majority would be acceded to Pakistan and the one with Hindu majority would be acceded to India.
The situation in Kashmir was that it had Muslims as majority but the provincial ruler was a Hindu and he decided to annex this region with India (without focusing on the British principle for the partition). He was then threatened by the Muslims there and migrated to Delhi.
On retaliation, India send its troops to Kashmir, while Pakistan army interfered from the western side and the war of 1948 took place, which ended in a stalemate with Kashmir territory divided among the two sides.
i didn't know that china is involved in that area too
China became involved in this region during the 1962 Indo-China war (fought for border settlement), which ended with chinese forces occupying almost 20% of Kashmir territory and defeat of India.