An x-ray pulsar forms when a dense neutron star's strong gravitational field allows it to suck in matter from the other star in the binary system. The impact of stellar material forms x-ray hotspots on the neutron star that shift as it rotates—that's what pulses are.
The navigation system relies on x-ray pulsars found in systems with two stars. Essentially a dense neutron star's strong magnetic field pulls in gas from the other star, and when the gas impacts the neutron star, it generates a strong X-ray hotspot. If the neutron star's spin axis and magnetic axis are not aligned, as the neutron star rotates, pulses will be generated as the X-ray hotspots move in and out of the observer's view. This turns out to be a useful tool for navigation.
Millisecond pulsars generate x-ray pulses at such short intervals, that by measuring the time differential from multiple known pulsars (like a GPS using pulsars instead of satellites), a spacecraft can determine its location in the solar system within 5 kilometers (3.1 miles), which is pretty good for deep space. The trick is to find pulsars that provide pulses at a consistent pace; x-ray pulsars often speed up or slow down the frequency of their bursts.
If all goes as planned, the XPNAV 1 will both gather data to build the pulsar x-ray database and then be able to use that data to independently verify its location. The 529-pound satellite has two detectors to measure x-rays generated by pulsars. Over the next five to ten years, XPNAV 1 will build a database of x-rays from 26 pulsars, measuring their frequencies against other electromagnetic activity in space. It will also measure the accuracy and consistency of pulsar x-rays against background space noise, without having to worry about atmospheric interference. It will verify the usability of the data by testing the data to see if the data can predict the satellite's location, independent of other navigation aids.
The advantages of x-ray navigation include greater accuracy and reliability; spacecraft wouldn't need to rely on radio signals that take longer to travel into deep space and lose signal fidelity. X-ray navigation is also cheaper, because the spacecraft would no longer need large, expensive ground-based radio antennae for navigation signals. Additionally, the spacecraft would be more autonomous, saving bandwidth for the transmission of scientific data back to earth. The success of XPNAV 1 would mean that not only has China achieved a major milestone in space technology, but it could also allow Chinese taikonauts and robotic probes to travel more freely beyond orbit.