The headline risk here, folks, is that if you wait for your central banker to give you insight into ...
How Does North Korea's Leader Affect China?
12/28/2011 11:36 am EST
These two nations have been physically, ideologically, and economically linked for decades in some cases, centuries in others. What happens next? So asks James Trippon of China Stock Digest.
When China's President Hu Jintao, along with Vice-President Xi Jinping, went to the North Korean embassy in Beijing to pay their respects in the aftermath of the death of North Korean leader Kim Jong-il, the rest of the world no doubt took this as a simple sign of the close relations between China and North Korea.
The sudden death of the 69-year-old North Korean dictator, however, shouldn't obscure the reality that China's relationship to North Korea is anything but simple. It's easy to misread this in the West, as not much attention is given to the relational nuances of what is viewed as a near-rogue political state, North Korea, with the largest economic power in the region, China.
The Asian markets, though, noticed. The South Korean Kospi index was down 4.9% early on Monday, December 19, when news of the death was first released. Later, the South Korean index climbed back to end the trading day off 3.43%.
Japan's Nikkei finished down 1.26%, while the Shanghai Composite was off only a scant 0.3%. Hong Kong's Hang Seng lost 1.18 percent, and Taiwan's TAIEX retreated 2.28%. These markets reflected a "wondering what comes next" attitude.
While China has assisted North Korea's meager economy with cash and trade, North Korea's economic problems have intensified since it drew international sanctions after its nuclear weapons tests in 2006 and 2009.
China has tried to increase trade with North Korea, with nearly $3 billion in mutual trade in the first half of 2011. North Korea still desperately lags its counterpart, South Korea, in economic strength, as well as lagging far behind highly developed Japan.
Both South Korea and Japan, as US allies, are two of the main reasons for China's alliance with North Korea, as Beijing sees North Korea as a strategic barrier to US influence in the region. With the succession of Kim Jong-un to power in Pyongyang, the reportedly 27 year-old son of the late Kim Jong-il, there is great uncertainty over the future and stability on the Korean Peninsula.
Only days later, a power sharing collective of Kim Jong-un and the North Korean military emerged as the ruling group for now. There are strong figures behind both Kim Jong-un and the military faction, so it's unclear how this will play out.
While apparently North Korea fired a test missile on December 19 as a show of strength, according to a Reuters source, China's interests undoubtedly go beyond maintaining North Korea as a buffer to the US and the West.
China lives in close quarters with North Korea, sharing a nearly 900-mile border with its neighbor. It has great interest in political stability on the Korean Peninsula and the region. This is something which has not only led it to lend an economic hand to North Korea, but it's also led Beijing to carefully encourage the previous regime in Pyongyang to pursue economic reforms.
Yet just as Beijing sought to discourage North Korea's pursuit of nuclear weapons, its attempts at getting Pyongyang to do business in a more modern, effective way have largely failed. The impoverished North Korea as a world political pariah must have made China privately nervous, no matter its public utterances. The death of Kim Jong-il now intensifies these uncertainties, which could become instabilities.
Observers have speculated on the next direction for North Korea being as varied as possible gradual economic reforms or even eventual unification with South Korea, to the view that the new ruling collective will fail to hold power, which will lead to a politically unstable country.
Unification with the south seems an extremely unlikely near- or medium-term outcome. But so, too, would violence and insurrection, even if political instability were to come about. At the moment, there is neither the will nor any widespread movement either for unification or for political violence.
China, for its part, has direct concerns of its own. It is facing a self-designed leadership succession next year which it wants to go smoothly. It's also facing slowing economic growth while it's trying to keep inflation in check. China seems mainly interested in economics, in its business, far more than any ideology which may linger in Pyongyang.
China's leadership succession process is also a key to understanding the way China wants to keep doing business, which is smoothly. China's interest in North Korea is that Pyongyang's problems don't interfere with China's business, or the gradual, measured approach that China uses to implement its true ideology, which has become one of economics.
Related Articles on GLOBAL
The S&P 500 Index peaked on August 29 and has been treading water since then. (See chart below.)...
Global dividends reached record levels in the second quarter of 2018, reflecting strong earnings and...
In the current environment, almost any stock purchase is speculative; our latest recommendation &mda...