Potential Korean Conflict

I've turned "chicken" on South Korea today, in the light of recent developments and dumped my holding of Ishares Msci Korea (LON:IKOR) at a small profit.

I am particularly concerned about what might transpire this weekend, with the George Washington steaming into the Yellow Sea and the US about to embark on exercises with South Korea.

Whilst this article downplays the threat from the North, I find China's involvement and stance extremely troubling:

 

...Jia Qingguo, vice-dean of Peking University's School of International Studies, says China believes it needs a viable North Korea for as long as America sells weapons to Taiwan. ''If the US is a threat then North Korea has dual importance because if there is a military conflict then North Korea can be strategically very valuable because South Korea is an ally of the US,'' says Professor Jia. ''This is the logic … China-North Korea relations happen within this bigger contest.''

China has avoided apportioning any blame for this week's North Korean artillery bombardment that killed two marines and two civilians and wounded more than a dozen others, in what is said to be the first attack on South Korean civilians since the 1950-53 Korean War.

China's latest moves to draw closer to its wayward neighbour include reglorifying their joint exploits during the devastating Korean War, which many Chinese historians agree began with the North invading the South. It was ''a just war to defend peace against aggression from the United States'', said Vice-President Xi Jinping, who is expected to begin succeeding President Hu Jintao in 2012.

One of the legacies of that war is that North Korea and China never accepted the US-imposed ''northern limit line'', which closely hugs the North Korean coast in the Yellow Sea. The North claims a ''military demarcation line'' that more evenly divides the seas between two countries and which is much further to the south. It is instructive that the torpedoing of the Cheonan warship in March and this week's shelling of a South Korean island both occurred in territory claimed by both sides.

There is internal logic for the military's supreme command of North Korea claiming that this week's deadly bombardment was ''retaliation'' against South Korean military exercises in those disputed waters. It said those exercises were military provocation and ''a sinister attempt to defend the brigandish 'northern limit line' ''...

 

Whilst North Korea's shelling is unforgiveable, IMO, I don't see how these joint exercises with South Korea will improve matters and strike me as extremely dangerous. Bringing in the George Washington is understandable, as a show of support and to indicate that the shelling cannot be without consequences, but it seems to me that conducting exercises could really put the situation on a hair-trigger. I hope that US strategists know what they're doing and are simultaneously pursuing every diplomatic channel with China to try to avoid conflict. If not, this could have implications far wider that just between the Koreas.

In such times, I am very happy to retain my gold and oil related investment, as well as to husband the cash released by my Ishares Msci Korea (LON:IKOR) sale.

Mark