Update on Korean Peninsula
The death of North Korean leader Kim Jong-il on December 17, 2011, escalated the uncertainty surrounding the regime change in Korea, which was preparing for a leadership transition in 2012. Very little is known about Kim Jong-un, the young man who is taking on the role of dynastic head. Some analysts feel that the death of Kim Jong-il sharply increases the risks and uncertainties from the secretive Pyongyang regime, which has significant consequences for security on the Korean peninsula and beyond. South Korea and Japan are most immediately threatened, but China and the U.S. are also deeply involved with vital stakes in North Korea’s future.
We believe Kim Jong-un, being untried and young, may not be entrusted with the power his father had, at least initially, and there is a chance that he will be affected by the rest of the Kim family. We think there is a potential risk that the regime may undertake some type of military activity or nuclear tests in an effort by the new leadership to demonstrate to the outside world that there has been no regime policy change, internal strife or reunification with the south.
However, uncertainties and risks in Korea have been with us for a long time, since the end of the Korean War in 1953. There has always been a threat of invasion from the north, and this threat has been amplified by the various actions taken by the North Koreans over the years. Therefore, some foreign investors have become inured to the situation.
We suspect this regime change is unlikely to create any immediate substantive impact on other North Asian financial markets for the moment, but any increase in tension on the Korean peninsula may result in some capital moving from South Korea into markets like China, Japan and Hong Kong. However we do not see that happening at this stage.
On a more optimistic note, we expect the new leaders may be willing to adopt Chinese-style economic reforms, which could result in a much more relaxed political environment. We feel the fundamentals for South Korea remain strong generally and the country has continued to show resilient growth on a longer-term basis. In November, South Korea ratified the free trade agreement with the U.S., which could result in increased trade between the two nations upon its implementation in January 2012.