Well the fact of the matter is that all the flag hoisting, stone throwing, effigy burning nonsense is irrelevant. Its the same story in Tibet. India can and will control any disruptions in the state's affairs, any and all outside interference will be countered.
If there's ever going to be a settlement, it will have to account for India's strategic concerns (water especially). The Northern Areas, Azad Kashmir and Aksai Chin will also have to be a part of the settlement.
India will not and should not make any concessions to Pakistan, nor is it keen on the balkanization of South Asia. IMO, the best we can hope for is a small, jointly administered region carved out of AK, IK and NA.
w.r.t China, they can always be brought into the loop later. A settlement of the Kashmir issue is not in their interest, so they would be more than happy to drag their feet on the issue. India and Pakistan need to move on.
I think a settlement is not in our favor right now, it might be a better idea to wait for another 5 years, the situation in Pakistan and Afghanistan is still evolving, I think down the line India will be able to bargain from a position of considerable strength, and while the settlement might not necessarily be on our terms, we might be able to make it a little more favorable, certainly permanent.
At the moment, I think it is in the interest of both India and Pakistan, that Pakistan throw its weight behind the American campaign, and take credible and firm action against any and all terrorists on its soil.
Only when that happens can we really get the ball rolling on Kashmir.
I think the Afghan war will change the political dynamic in South Asia forever, this is going to be a very interesting and tumultuous period, mostly for Pakistan. There are many opposing forces at play in Pakistan. Lets wait and watch, we will all have much to discuss here at Pakistan Defence.
Regards.