published Feb 21st 2017, 4:00 pm, by Junheng Li

(Bloomberg View) —
North Korea’s test of a ballistic missile on Feb. 11 and the assassination of Kim Jong Nam, the estranged half-brother of Kim Jong Un, in Kuala Lumpur on Feb. 13, are a reminder of two uncomfortable facts.

First, the leader of North Korea, who ordered the murder of his uncle and possibly that of his half-brother, is capable of anything to safeguard his rule. Second, North Korea is rapidly approaching the point where it will be able to use ballistic missiles with nuclear payloads. South Korea is already at risk, and Japan soon will be, too. Intercontinental ballistic missiles capable of striking Australia and the West Coast of the U.S. with a nuclear payload are unlikely to be more than a few years away.

The range of countries to which North Korea’s growing nuclear warfare capabilities poses an existential threat is growing steadily. China, even if it isn’t a direct target, has much to fear. Political chaos and further economic collapse along with a large-scale famine could send many of North Korea’s 25 million citizens fleeing over the northern border. The economic cost and the political risks associated with a large inflow of refugees would pose a serious challenge to the Chinese authorities.

China has wanted economic changes in North Korea along the lines of the market reforms initiated by Deng Xiaoping in 1979. It considers such reforms necessary to prevent an economic collapse. Kim Jong Nam was a proponent of such an evolution. He lived, under Chinese protection, in Macao.

China also fears a reunification of the two Koreas that would take the form of an effective takeover of the North by the South. Strategically and politically China does not want South Korean and U.S. troops on its border. Having the Terminal High Altitude Area Defense system, an anti-ballistic missile defense offered by the U.S. to South Korea, deployed at its border with a newly unified Korea would be interpreted as a public slap in the face by China’s rulers.

There is some hope, however, that the steady progress toward nuclear warfare capability achieved by North Korea and the abandonment of any hope for the economic reforms necessary to prevent an economic collapse could create strategic common ground between China and the U.S. In response to the latest test-firing, China announced it would suspend North Korean coal imports to China, starting Feb. 19, for the rest of the year. Unlike earlier bans imposed by China, this one includes coal already “in transit.” Coal represents about one-third of North Korea’s total exports and almost all of these exports (which account for around $1 billion of total gross domestic product of about $17 billion) go to China.

Much still divides the U.S. and China. The disputed islands in the South China Sea, the disagreements about trade and possible currency manipulation, and the likely growing disagreements about Chinese foreign direct investment in the U.S. and U.S. FDI in China are not going away.

But North Korea poses an existential threat to both countries (as well as to South Korea and Japan). A deal is possible between China and the U.S. (and its allies in the region) that would materially reduce the threat. The U.S. would have to make concessions. Giving in on THAAD would be easier if elections in South Korea were to produce a more left-leaning government.

If and when the U.S. and China adopt a common approach to North Korea, the risk of other disputes flaring up diminishes. At first glance, there is no direct connection between progress in limiting the nuclear threat posed by North Korea and easing other confrontations between the two largest economies in the world (such as trade and labeling China as a currency manipulator). But politics is a seamless web: Progress anywhere makes progress everywhere more likely.

So the bad news about North Korea may turn out not to be so bad after all.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Junheng Li is the founder of JL Warren Capital LLC, an independent equity research firm focused on Chinese companies and the Chinese economy. She is the author of “Tiger Woman on Wall Street — Winning Business Strategies from Shanghai to New York and Back”
To contact the author of this story: Junheng Li at junh@jlwarrencapital.comTo contact the editor responsible for this story: Max Berley at mberley@bloomberg.net
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