#northkoreanroulette

Kim sends more firecrackers across Japan that could hit Guam

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This cannot continue. Another missile fired across Japan’s shores. This missile flying 3,700km. Guam is technically in range by that measure. As I said on The Bolt Report, Kim’s technology will get to a point where he can become a serious threat. Taking out the threat before it gets even more capable is the only credible option. Even more biting UN sanctions haven’t stopped his quest to launch more missiles in utter defiance. My key thought is that China will be coerced into forcing regime change. It cannot afford to lose the strategic buffer North Korea provides but it can even less afford US military action on its back door. Unilateral action by China will not be frowned on by the majority of the rest of the world if Kim Jong Un is neutered.

Some discussions have also questioned whether he lobs missiles over Tokyo airspace. The danger here is a failure through dense commercial air traffic lanes. In any event the world community can’t sit by and let this oppressive regime continue a weapons program to use for extortion. Trump was on a morning breakfast program yesterday discussing North Korea where he effectively said for “China to start taking action”.

As I wrote last week, Japan’s entire Aegis destroyer fleet from Maizuru is at sea. They carry the SM-3 anti-ballistic missile system. Japan cannot take North Korea’s actions as anything other than the gravest threat to national security.

This crisis has to have an ending. It can only be Kim Jong Un’s. Watch China’s movements closely from here. They’re reaching breaking point on strategy.

Follow the market on North Korea

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Follow the market. Financial markets are the ultimate arbiter of risk. What we have here is the 5yr Republic of Korea CDS which gives a rough guideline of how risk is being priced over time. Clearly unchartered waters at the time of GFC saw Korean risk leap to 700bps. The death of Dear Leader Kim Jong-Il saw around 240bps on the clock and Kim Jong-Un’s first nuclear weapons test saw a slight nudge over 100bps before sliding back to a standard 50bps range. Since Trump sent a carrier battle group and China issued an ultimatum (the ‘bottom line’) the rate has popped to 58.7 from 50-odd earlier in the week. It will be no surprise to see the fear factor rise in coming days but the odds are now on for China to take charge and work to install a pro-Beijing puppet which can be sold as a way to dismantle the nuclear threat and remain China’s protectorate. Kim Jong-Un may be offered a Rimowa of cash and an Idi Amin style exile in Saudi Arabia as a way to saving his hide because he has no alternatives and backing down in the face of the current situation will bring his power into question. China wants North Korea to survive for its political aims. For now markets are not panicking. Gold drifting higher and Korean won softening but it is hardly showing fear at this stage.

China send ultimatum to Kim Jong-Un

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As written yesterday in North Korean Roulette, “China has no choice but to step up to prevent the US giving it a bigger headache than it already has. Trump has clearly shown he is willing to pull the trigger when nations get out of line…Somehow China will be summoning Sun Tzu before it escalates out of its control.” So it appears China have overnight sent a ‘bottom line‘ threat to North Korea saying it’ll bomb their nuclear sites if crossed. According to the military-focused Global Times (owned and operated by the Communist Party’s People’s Daily newspaper), said that if the North impacts China with its illicit nuclear tests through either “nuclear leakage or pollution”, then China will strike hard. Taking out North Korea’s nuke arsenal would also win China credibility in neutralizing a global threat. Without nukes North Korea is a toothless tiger and Trump could end up with the result he needs by forcing Xi to act. That may well be to remove Kim and install a puppet. Korean CDS have edged slightly higher to 57.8bps but hardly showing fear. China is Kim Jong-Un’s biggest client. Best heed the warning.

North Korean Roulette

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In years gone past, North Korea used to up the ante on its belligerence when it needed a cash injection. Its neighbours tended to see that as the easiest way to put the Hermit Kingdom back in its place. Sure enough the North Koreans went away until the next ‘hit’ was required. China bought coal from North Korea to give it hard currency and prevent 20 million starving refugees trying to cross its border. It is no surprise that China has mobilized 150,000 troops to watch it. China has recently banned coal imports from North Korea to send a message that KJ-U’s antics can’t be tolerated. It may well be that the Trump/Xi dinner at Mar-a-Lago wasn’t clinking champagne but scoffing Red Bull over a chess board.

The chart above shows the extent of Kim Jong-Un’s thirst for missile testing. For a man willing to knock off his own brother, a man who looked as if he had no eyes on usurping Dear Leader, Kim Jong-Un will be an all or nothing trade. Cutting the head off this snake would plunge North Korea into deep crisis. It is highly likely that the many of the adoring generals all hate each other. Although China is likely to have a puppet in waiting.

The other problem is that all the while no action is taken, PyongYang’s arsenal grows more sophisticated. Eventually it will be sufficiently credible. In 1994 then President Bill Clinton came closest to taking action against its nuclear capability but in the end chose diplomacy.

On April 10, China’s special envoy on the North Korean nuclear programme, Wu Dawei, visited Seoul with the idea of pushing a harder UN resolution in case of another nuclear test. In the short term China is hoping a short term halt to coal imports will bring Kim Jong-Un to heel they have not ruled out removing him.entirely. It is the least preferred option but now Trump has dispatched a carrier battle group nearby China is being forced to up the ante.

Let us not forget the strategic benefits of North Korea to China. It provides a buffer to the US friendly South Korea and keeps China the dominant player geopolitically in the peninsula. However China must be thinking Kim Jong-Un is becoming more of a liability than an asset. How does it keep the strategic importance of North Korea in a palatable package that even Trump can tolerate?

North Korea has 3 main nuclear missile launch sites (Musudan-Ri,  Punggye-Ri and Tongchang-Ri) among the fourteen nuclear facilities ranging from R&D, power generation,  mining and refined fissile material production. A surgical strike would be difficult to achieve without North Korea getting away a few missiles itself. Naturally Japan would be a soft target for reprisal given its pacifist nature.

China has no choice but to step up to prevent the US giving it a bigger headache than it already has. Trump has clearly shown he is willing to pull the trigger when nations get out of line. Should he shoot one of Kim Jong-Un’s missile tests down to show he isn’t joking Kim will need to weigh up being a laughing stock by backing down or go down in a blaze of glory. Somehow China will be summoning Sun Tzu before it escalates out of its control.

One interesting take is the reaction on financial markets. South Korean CDS have jumped from 50bps to 57bps in recent days.  When Kim Jong-Il died these rates surged to 240bps from around 100bps. GFC by way of comparison was 700bps. The Korean Won has slid for 6 days running but it hardly looks like a collapse.