North Korea and China

Lots of advice for everyone today in the papers and on the internet as to how to deal with the conflagration happening in the Korean peninsula.  It shuddered markets.

I don’t claim to be an expert on China.  I have listened to some lectures about China, and have several friends there.  I also have some South Korean friends-but no one in North Korea.  Does anyone have a friend in North Korea?   As a trader though, I keep a keen eye on situations like this.  They effect my bottom line.

People begin to make a lot of assumptions in situations like this. They try to understand it through a frame that simplifies the situation.   I don’t know that it is safe to assume much of anything.  Let’s hope that American intelligence is up to snuff.  It’s pretty clear to me what the endgame is.  North Korea cannot be allowed to exist in the state that it’s in.   But, who knows the timing and who knows which country will throw the knockout punch.

It’s also not clear to me that the Chinese hold the only puppet strings here.  The Japanese might have a lot to say about the situation.  The last thing the Chinese want is the Japanese to begin rising again.  The US certainly holds some of the cards, and we all discount South Korea.

China and Japan are still harboring a lot of ill effects from World War Two.  The Japanese occupied China and by all historical accounts, treated them badly.  That’s an understatement.  Neither country trusts the other.  They compete economically.

It might be a good assumption to think that South Korea will do almost everything it can to avoid a war.  In my mind, they have had the patience of Job in the last year.  They lost a naval ship, and now have had to endure shelling from a hostile enemy.

From this morning’s Financial Times opinion page,

“China must stop ducking its responsibility. This is not a new call. The world’s second largest economy is concerned less about nuclear proliferation than regime collapse: it shares 900 miles with North Korea and enjoys the buffer between itself and US troops in South Korea.”

And across the pond the Wall Street Journal opines, “The Obama administration has said that the bombardment of Yeonpyeong is not a crisis, which is probably wise if the aim is to avoid granting the North even more leverage. On the other hand, it would be a colossal mistake to return to negotiations as if provocations are merely the price of doing business with Pyongyang. The focus right now should be on containment, interdiction and pressure. The inability to do so on a sustained basis until now was a failure of policy, not intelligence.”.

China is afraid that if North Korea breaks, refugees it is not prepared to take care of will cross the border and enter China.  There are long term historical tensions that sometimes bubble up to the surface in Asia.  Historian Yonson Ahn says, “there exists a very central conflict and ongoing debate between China and Korea. It concerns the history and heritage of Koguryo/Gaogouli (37BC-AD668), which is often referred to as one of the ancient Three Kingdoms of Korea, along with Paekche and Silla. Koguryo/Gaogouli encompassed a vast area from central Manchuria to south of Seoul at the height of its power, around the fifth century.”. She goes on to say, “The view of many Korean nationalist scholars is that the Northeast Project is part of an aggressive Chinese move to claim territory and history whose implications loom particularly large in the event of a North Korean collapse. They argue that the Project is clearly concerned with potential border issues and territorial claims that could impact in the event either of the collapse of North Korea or reunification of the two Koreas. ( Choe Kwang-sik 2004-a) In fact, the Chinese are concerned about potential political instability in the border regions in the event of a North Korean collapse, particularly a flood of refugees and territorial boundary disputes.  Such territorial concern has been expressed by Chinese historian Sun Jinji ( 2004-a ). Maintaining the integrity and stability of the nation constitutes another concern in the background of launching the Northeast Project. Scholars such as Quan Zhezhu (2003), Sun Jinji, Kim Hui-kyo (2004) and Mark Byington (2004-a) perceive the launching of the Project as a defensive reaction to preserve China’s own territorial integrity and stability.”  So, there is some reticence by the Chinese to just open up the border and let every one in.

Secondly, it is not smart policy to publicly embarrass China.  The Chinese may have been caught off guard by the aggressive action.  If I were Obama, I would work quietly and patiently behind closed doors.  Somehow, the Chinese need to be seen as supporting North Korea, while letting the regime fail.  It is possible to get the South Koreans and Japanese on board with this tac if war is avoided and no one gives up any big strategic issues in the negotiation.

Obama, Geithner and Bernanke handled the Chinese currency issue inappropriately.  They tried to get the Chinese to publicly lose face with regard to currency and trading.  So, how much confidence do we have that they can handle this one well?  Obama has constantly misstepped when there has been a cause for leadership.  The Gulf Oil spill, the economic crisis, the attitude post election.  He only gets so many bites at the apple to be a leader.  Now is one where he must, or lose total confidence.

Markets will take their cues from good leadership.  In the short term, it will pay to continue to be long the dollar, long commodities, and short the stock market.  Not only is this thorny Korean situation plaguing us, but the economic situation in Europe is forcing the same position.

Are we close to an all out war?  I don’t think so.  However, it’s certainly within the realm of probability.  We are nearer the mean on the bell curve than I think anyone wants to be.   Hopefully, we have the luxury of time.

This Korea issue is always there, simmering under the surface.  Since 1953 it has been hanging around.  As Asia rises, the issue becomes hotter.  North Korea cannot continue with its present form of government.  How we get rid of it is the problem.


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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