China's Defense of North Korean Ally Risks Alienating Top Trading Partners

China’s reluctance to restrain North Korea comes with a price, putting it at odds with its three biggest trading partners and threatening to drive South Korea and Japan into a closer alliance with the U.S.

China has avoided blaming its ally of 60 years for last week’s artillery attack on South Korea, which killed four people. Instead, it criticized joint naval exercises by South Korea and the U.S. that began yesterday in the Yellow Sea.

In doing so, President Hu Jintao is putting political priorities ahead of the economic interests that helped China’s gross domestic product expand more than 90-fold in the past three decades to become the world’s second largest. Combined trade with the U.S., Japan and South Korea, which have all urged China to restrain the regime in Pyongyang, is almost 300 times larger than its commerce with North Korea.

“The Chinese leadership is very cautious, so they opt to go light on North Korea, even at very substantial cost to their relations with South Korea, Japan, the U.S. and Australia,” said Kenneth Lieberthal, director of the John L. Thornton China Center at the Brookings Institution in Washington.

China’s economic integration with the world has been accompanied by a growing stake in financial markets that have been rattled by tensions on the Korean peninsula. Its $2.6 trillion of foreign currency reserves is more than twice the amount in Japan, the second-largest holder, and included $883.5 billion of U.S. Treasuries as of September.

Stocks Trading

The combined value of stocks traded in China and Hong Kong account for 13 percent of the global total, double the size of the U.K. equity market. The MSCI World index fell as much as 2 percent on Nov. 23, the day North Korea fired at the South Korean island of Yeonpyeong. The won and the yen have led Asian currencies lower since the artillery attack.

The Chinese government’s main goal is to preserve regional stability by preventing the collapse of Kim Jong Il’s regime, which might unleash a flood of refugees into northeastern China along a shared 1,415-kilometer (880-mile) border and create a democratic, unified Korea allied with the U.S.

“The Chinese worry about refugees and chaos from a North Korean collapse in the short term, and in the long term of the magnetic effect of having a strong modernized Korea of 75 million people on their border,” said Michael J. Green, senior adviser at the Center for Strategic and International Studies in Washington and a former senior director for Asia at the National Security Council under President George W. Bush.

‘Calm and Restraint’

Since the shelling of Yeonpyeong, China has mostly limited itself to calls for calm and restraint. Wu Dawei, China’s top negotiator for multinational talks aimed at curbing North Korea’s nuclear program, yesterday proposed an “emergency” meeting of the two Koreas, China, the U.S., Japan and Russia in Beijing next month.

“The six-party talks cannot substitute for action by North Korea to comply with its obligations,” said Nicholas J.C. Snyder, a spokesman at the U.S. Embassy in Beijing. “Clear steps by North Korea are needed to demonstrate a change of behavior.”

With China unable to stop North Korea’s nuclear weapons proliferation efforts, it’s not clear how much sway it holds over the regime, said Lieberthal. “They have not done very well in getting the North Koreans to make the decisions they want the North Koreans to make,” he said.

Request to China

In 2007, U.S. Secretary of State Condoleezza Rice instructed the U.S. Embassy in Beijing to ask Chinese authorities to block exports of North Korean missile parts to Iran through Beijing, according to a cable released on the WikiLeaks.org website.

“Request China to stop an imminent shipment to Iran’s ballistic missile program,” reads the Oct. 31 cable, labeled “Secret” and posted by WikiLeaks, a non-profit organization that has put on the Internet thousands of confidential U.S. government communications.

“Remind Chinese officials that President Bush has been personally engaged on the issue of the transshipment of ballistic missile parts between North Korea and Iran via Beijing,” the cable said.

South Korea showed little interest in the Chinese proposal for emergency talks, with its Ministry of Foreign Affairs and Trade saying only that it would consider it “very cautiously.”

“Right now, it’s just useless talk to simply call for getting back to talks,” said Victor Cha, who holds the Korea Chair at the Center for Strategic and International Studies in Washington. “It’s typical no-risk, no-cost, no-commitment China.”

Criticizing Exercises

While resisting calls to pressure North Korea, China has criticized the exercises involving the nuclear-powered aircraft carrier USS George Washington.

On Nov. 26, Foreign Ministry Spokesman Hong Lei said China was opposed to any country conducting military activities without permission in its exclusive economic zone, which extends for 200 nautical miles from its coast. China’s territorial waters end 12 miles from the shoreline.

China’s fear of being contained may explain its behavior, said Bonnie Glaser, a senior fellow at the Center for Strategic and International Studies in Washington. China sees the U.S. under President Barack Obama as increasingly trying to stem its influence in Asia, she said.

Counterbalance China

“The U.S. is seen at best as seeking to counterbalance Chinese influence throughout the Asia-Pacific, and, at worst, to strategically encircle and contain China’s rise,” Glaser said. “Against this background, North Korea is still an important strategic asset.”

China’s reluctance to break with its ally is also due to a shared history in the 1950-53 Korean War, when they fought against U.S.-led forces. In October, Chinese General Guo Boxiong, a member of China’s ruling Politburo, traveled to North Korea to commemorate what he called their joint victory over the “imperialist aggression.”

China’s stance threatens to further sour relations with its biggest Asian trading partners. Ties with South Korea were already strained after China refused to blame North Korea for the sinking of a South Korean warship in March that killed 46 sailors. In Japan, polls showed trust of China plummeting after a territorial dispute over uninhabited islands flared up in September.

Trade Relations

In the first seven months of this year, China’s two-way trade with the U.S., Japan and South Korea was a combined $484.7 billion, according to China’s customs bureau. During the same period, trade between China and North Korea amounted to $1.65 billion.

The mismatch has led some officials in Beijing to push for an overhaul of ties, focusing on a more realistic sense of “what North Korea means to China,” said Zhu Feng, a professor of international relations at Peking University.

“The attack has injected growing anxiety about the stability of the North Korean behavior among Chinese diplomats and officials,” Zhu said.

China’s leverage over North Korea stems from its role as the north’s biggest trading partner and supplier of much of its foreign currency, fuel and food.

The reluctance to use that influence may backfire, Lieberthal said. The Chinese “may inadvertently create their own worst situation, where the North Korean regime ceases to be viable,” he said.

--Michael Forsythe, Peter S. Green. With assistance from Viola Gienger, Miles Weiss and Joshua Zumbrun in Washington. Editors: Ken Fireman, Bill Austin

To contact the Bloomberg News staff on this story: Michael Forsythe in Beijing at mforsythe@bloomberg.net; Peter S. Green in New York at psgreen@bloomberg.net.

To contact the editors responsible for this story: Bill Austin at billaustin@bloomberg.net; Mark Silva at msilva34@bloomberg.net

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