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2018 April
Korean Peninsula: From Danger to Opportunity?

North Korea-US and Inter-Korean relations had continued to be strained last year. It was only after the Pyeongchang 2018 Winter Olympics that the situation turned around sharply, with North Korea repeatedly extending olive branches. Nevertheless, all parties are still showing cautious optimism and even suspicions.

 

Steve Chung: North Korea-US meeting uncertain

Since taking office, US President Donald Trump has been engaged in a bitter war of words with North Korean leader Kim Jong-un, causing bilateral relations to remain strained last year. However, using the opening created by the Pyeongchang Winter Olympics earlier this year, Kim invited South Korean President Moon Jae-in for talks. He even expressed his willingness to meet with Trump on the premise of denuclearization, which seems to bring about an opportunity to ease the tension between each other.

 

Kim has changed his past attitude since the start of 2018. Besides sending athletes to participate in the Pyeongchang Winter Olympics, he sent a personal letter through his sister Kim Yo-jong to the South Korean President to invite him to Pyongyang. This will not only help improve relations between the two Koreas, but also project a more positive image for North Korea. Steve Chung, Assistant Lecturer of the Faculty of Social Science at the Chinese University of Hong Kong and an expert who has studied North and South Korean affairs for the past 20 years, believes that Kim’s attitude change was not sudden and was largely due to the stronger sanctions imposed by the US.

 

Various reasons for easing tense relations

“Kim Jong-un is not a charismatic leader. Different from his father and grandfather who had made contributions to North Korea, he is able to win the support of the people and maintain the stability of his regime mainly because of two aspects: one is the glorious feeling arising from nuclear weapons development; the other is his promise to implement a governance policy that promotes economic development and improves people’s lives.” Chung added that US sanctions against North Korea are broad-based. it will pose a major threat to the Kim regime, which forces Kim to take proactive action to break the deadlock.

 

Chung acknowledged that the Pyeongchang Winter Olympics provided Kim with an ideal platform to ease tensions with neighbouring countries and he took the opportunity to invite Moon to visit North Korea. He later also expressed his willingness to talk with the US, thus changing his hardline stance of the past. “As for the US, Trump also wants to use the opportunity to resolve the North Korean issue and establish personal political achievements during his presidency. Therefore, both parties have incentives to make the meeting happen.”

 

Uncertainties surround negotiation details

Chung pointed out that the meeting between the two countries’ leaders still has many details yet to be finalized. There are also many differences between them, while neither Trump nor Kim will give in easily. Just the decision on the venue for negotiations alone will lead to disagreement.

 

“The venue for negotiations between the two countries will be either the US, North Korea, or a neutral country or region such as Beijing and Hong Kong. Nonetheless, according to North Korea’s practice, all previous high-level meetings were held in Pyongyang. Kim is also worried that once he is out of the country, there may be the danger of political subversion and assassination. Therefore, he may ask Trump to visit Pyongyang. However, Trump may be concerned that this will raise North Korea’s status and hence may not be willing to agree with it.” Chung said that both sides will face lots of challenges when they later coordinate and arrange for the meeting.

 

Difficult to assess outcome of meeting

As to whether the North Korea-US meeting can achieve substantive results, Chung pointed out that it is difficult to assess at this stage and we should not be overly optimistic. “Past negotiations between the US and North Korea on the latter’s nuclear issue had been marred by clashes, and both sides had gone back on their word, with North Korea employing lots of strange tactics. Both sides have cried wolf too many times and always distrusted each other, which is not conducive to this meeting.” North Korea is also worried that a change in US presidency may lead to major changes in US foreign policy.

 

Chung added that North Korea had previously promised to denuclearize, but it later reneged on that promise. Thus, it can be expected that the US and North Korea will have huge disagreement during the meeting on specific issues, especially the conditions for North Korea’s denuclearization. “Even if North Korea promises to denuclearize and allow the IAEA to inspect and verify, there are uncertainties as to whether North Korea will truly be open, whether the inspectors can freely operate on the ground, and what kind of concessions the US is willing to give in exchange for North Korea’s full denuclearization.”

 

Positive response from China, Japan and South Korea

Referring to South Korea’s crucial role, Chung believes at the summit meeting between the two Koreas at Panmunjom, their first since 2007, South Korea will likely test the waters by passing on Trump’s message and specifically mentioning the denuclearization issue.

 

As for the role of China and Japan, Chung said that China’s current participation is limited, but he believes it will be glad to see the North Korea-US meeting happen. This is because North Korea’s reconciliation with South Korea and the US will likely ease the tension in the surrounding areas, whereupon the latter two countries could reduce their military cooperation and strategic deployment. Japan will also like to see tension easing on the Korean Peninsula, as it will reduce the threat posed by North Korea’s missile tests and nuclear weapons programme. It could also later start negotiations with North Korea on the Japanese hostage issue and gradually improve the relations between the two countries. “To bring about a permanent peace agreement, other countries also have the chance to participate, and China’s participation is particularly critical. If North Korea has doubts about the US commitments, China’s involvement and monitoring will enhance its confidence.”

 

Alan Leung: North Korea-US situation has limited long-term market impact

There has been a breakthrough in North Korea-US relations recently when US President Donald Trump accepted North Korean leader Kim Jong-un’s invitation for a meeting. If it does take place, the meeting will be the first time in history the two leaders start a dialogue. At the same time, the North Korea-US meeting will ease the tensions in the Asian region. In particular, Japan, South Korea and China are all looking forward to a positive outcome from the meeting. With geopolitical factors cooling down and regional uncertainties clearing up, will the Asia Pacific economies and the US stock market benefit?

 

Alan Leung, Senior Economist & Strategist of Bank of Communication Hong Kong Branch, believes news of the North Korea-US meeting may give stock markets in Asia Pacific a short-term shot in the arm, especially the stock markets of Japan and South Korea. However, the news has little effect on the markets in the long run. “I hold a wait-and-see attitude towards the North Korea-US meeting. First, there has long been a lack of mutual trust between the two countries. North Korea has always regarded the US as an enemy and will not easily give up its nuclear weapons programme.” He added that details on the meeting are very limited as many specifics are yet to be firmed up, and North Korea has not reported much on the meeting, so he is doubtful as to whether the meeting could really take place.

 

Stock market growth still hinges on corporate performance

Although news of a possible meeting between the two countries’ leaders may immediately stimulate Asian and US stock markets, giving them a short-term boost, Leung believes the positive sentiment will very soon be digested. Actually, the long-term growth of stock markets has always been driven by corporate performance.

 

When asked if news of the North Korea-US meeting could stimulate the Hang Seng Index (HSI) to further challenge the high of 33,000 points, Leung stressed that the chance is low. He reiterated that the growth momentum of the HSI still depends on overall corporate performance, but he believes tech stocks still have considerable upside potential in the coming year.

 

Market already accustomed to erratic relations

As for the commodity market, Leung does not expect much impact from the news. “Last year, the market responded very mildly to the continuous flow of information coming out of North Korea and the US that strained bilateral relations, reflecting that it may have become accustomed to the erratic nature of the situation. Therefore, even if the Trump-Kim meeting does indeed take place, it will have little impact on the global prices of commodities such as gold and oil, although short-term fluctuations may still happen.”

 

Some commentators believe Kim is willing to meet with Trump only because he wants more time and resources to continue developing nuclear weapons. Leung is inclined to concur with this view. “North Korea had once softened its stance after its nuclear tests in 2012, but it later continued to develop nuclear weapons, showing that it will not easily stop its nuclear weapons programme.”

 

Short-term volatility may occur in response to development

 

Undeniably, North Korea had been erratic in its stance in the past. Leung believes the same may happen again in this meeting. He reminded investors to be mentally prepared that once this happens, the market may see short-term fluctuations. So, they must pay close attention to how the situation will pan out and exercise caution. As to comments that Trump might use the meeting to avert the controversy triggered by the recent trade war, Leung said that the two should be unrelated. “I think Trump’s biggest goal is just to make the meeting with Kim materialize so that his name will go down in history, rather than using the meeting to divert domestic attention.” Leung concluded that the meeting is more like a political wrestling between North Korea and the US than both sides really trying to ease the tension on the Korean Peninsula. North Korea hopes to use the meeting in exchange for resources to develop nuclear weapons and partial withdrawal of sanctions, while Trump pursues his own political achievements and carves a name for himself in history. Therefore, he still holds a wait-and-see attitude toward the outcome of the meeting.