China's Relationship With North Korea Will Affect US Investments In Asia

 |  Includes: AAPL
by: Little Apple

Recent tensions in Asia caused by North Korean threats could put US investments in the entire area at risk. One of China's top experts on North Korean affairs said that there is a 70-80% chance of war on the Korean Peninsula:

The remarks by Zhang Liangui, a professor of international strategic research at the Communist Party's Central Party School, came as mainland travel agencies cancelled tours to North Korea. "There is a 70 to 80 per cent chance that a war will happen because North Korean leader Kim Jong-un may want to use this opportunity to force a reunification of the Korean Peninsula," Zhang said.

This has caused some investment analysts to speculate that China may "abandon" its ties with North Korea. According to a report on Thursday, China has warned North Korea that this behavior is not acceptable and that the country will not allow "troublemaking" at China's doorsteps:

The Chinese People's Daily Online has published an article warning North Korea "not to misjudge" the situation with the United States and South Korea. Chinese Foreign Minister Wang Yi has reportedly spoken with UN Secretary General Ban Ki-moon over the phone, expressing severe concern over the current tense situation on the Korean Peninsula. He reportedly said Beijing "does not allow troublemaking at the doorsteps of China."

Rutgers-Camden Professor Marie Isabelle Chevrier, a top US nuclear and biological weapons expert and author of the new book Arms Control Policy: A Guide to the Issues told me by email that North Korea may have up to five nuclear weapons. However this test could fail. She is somewhat concerned that China may not be able to handle this situation:

China's recent actions are encouraging, but they may not be successful.

There could be a lot of damage done to the entire region if Kim Jong-un begins firing nuclear missiles, which he warned would be aimed at South Korea and the United States. Most tech products that are enjoyed by US citizens are produced in factories that could theoretically be completely wiped out with an intentional, or even accidental attack. Even without a direct attack, workers could be frightened and quit, and cargo ships within North Korean missile range could be in danger, forcing tanker companies to move the boats to safer waters. Thereby destroying the supply line of tech products to the United States:

If there were to be any disruption in the pace of manufacturing in either China or South Korea, or, in a nightmare scenario, both countries, or extend to nations of influence such as Taiwan, Singapore, Japan, Vietnam, Malaysia, and Indonesia, the technology industry as we know it would effectively come to a screeching halt....There are certainly risks that Kim Jong-Un may try to push the boundaries of what is acceptable and go too far... That would prompt a military retaliation by South Korea and the United States, and could escalate into an all-out conflict. In such a conflict, there is no question that South Korea's technology centers will be targets.

The author of that article thinks that China will be able to keep North Korea in check. However, if China pushes too hard, and threatens to cut supplies, it could become a target itself. And large American tech companies operating in China could become targets. The first one that comes to mind is Apple (NASDAQ:AAPL) with all of its popular iProducts that are made in China. Matthew Smith made a unique comparison that most analysts would not have considered. He found a distinct corellation between the US tech sector and the South Korean market:

The question is just how important is Korea and what are the ramifications of any North Korean hostilities? Well the answer may be surprising, because it is probably more important than you think. Take a look at the following chart and notice just how correlated the US tech sector is to the South Korean market.

Click to enlarge

The line he used for comparison was the NASDAQ, not just American companies operating in South Korea. So using his theory, anything that would cause the South Korean Market to drop would also cause the NASDAQ to drop.

Apple is already a puzzle. It was very clearly following the NASDAQ path at the beginning of the year. However, in September, the iPhone 5 disaster, which never happened according to the most bullish Apple investors, caused it to deviate down from the index. Because it really did happen. Now new rumors, that the company is coming out with a new fundamentally different music streaming service, are causing investors to get exited again.

Chart forApple Inc. (<a href=

But what about this crisis in Korea that could spread to China? According to one source 88% of Apple's "supply chain" is in Asia. And to regroup and bring the manufacturing to the United States would take a lot of very precious time. Especially if it is theoretically being done under military supervision. Hopefully the Apple "Team" is working on a "Plan B", but some doubt it:

I guess that's the definition of a multi-nation corporation right there. Overall, with 88 percent of Apple's supply chain in Asia, only 11 percent of Apple's suppliers are in its home country of the United States, and even fewer - seven percent - of Apple's suppliers are in Europe and the Middle East. Apple has planned to bring some manufacturing back to the United States. Tim Cook announced last year that Apple would be spending over $100 million to bring some manufacturing back to the U.S., a move that some have derided as a mere publicity stunt.

But the products that are part of Cook's plan to be produced here at home are not the popular iDevices which reportedly account for over 76 percent of Apple's revenue. Any type of military activity in the region could cause a big problem for the supply chain. So now the already exited and nervous Apple investor has one more thing to worry about. To buy Apple right now is a definite gamble. And it was a gamble before the Korean situation began. But with any gamble you can win or lose big.

There are so many more big companies, and industries, such as clothing production that would be affected by another Korean war. But that is beyond the scope of this article. If the North Korean incidents develop into a major military situation, the countries that could be most affected would be those in Eastern Aisia:

Country Area km² Population Population density
per km²
HDI (2011) Capital
China (PRC) 9,596,961 1,339,724,852 138 0.687 Beijing
Hong Kong (PRC) 1,104 7,061,200 6,390 0.898 Hong Kong
Japan 377,930 127,950,000 337 0.901 Tokyo
Macau (PRC) 30 556,800 18,662 No Data Macau
Mongolia 1,564,100 2,809,600 2 0.653 Ulaanbaatar
North Korea 120,538 24,346,000 198 No Data Pyongyang
South Korea 99,828 48,988,833 500 0.897 Seoul
Taiwan 36,188 23,174,528 639 0.882 Taipei
Click to enlarge

Check your portfolio, and see if the stocks you own have significant ties to these countries. If so, you should consider the possible outcomes in a wartime situation. That does not necessarily mean to go out and sell everything. Rather, watch investments closely and then make a decision. Some stocks might drop, offering great buying opportunities. And the possible destruction and/or supply interruption of a South Korean company like Samsung could cause Apple to jump. Consider that a shortage of new phones coming in to this country could make your iPhone worth more than an ounce of gold. The main thing is to stay informed. I really do not like to promote Gloom and Doom. But this time it may be real. On Wednesday afternoon many countries in the region went on high alert.

As some have said, China will handle this "kid". But don't bet the rent money on it. Because the more conservative investors will pull out first, before anything even happens. For many investors, it is not what is actually happening, but their perception of what is and/or will happen that can drive them to make an investment decision. The Washington Post is reporting that the North Korean situation is currently the hottest topic on the web:

U.S. Web users are searching for information about North Korea with astounding, unprecedented frequency. Google searches for "North Korea," currently seven times the previous peak during the country's 2006 nuclear test, are dramatically outpacing those for Beyonce or even President Obama.

Granted the United States will take every possible action to protect its assets in the region. According to this statement from Washington:

"And in the absence of concrete evidence to the contrary, we have to assume the worst case and that's why we're postured as we are today," said Dempsey, chairman of the US Joint Chiefs of Staff. The military has deployed US naval ships in the region capable of shooting down incoming missiles and staged a show of force with bomber aircraft in a bid to deter North Korea from launching any attack. Hagel said the United States and its allies hoped "that the rhetoric be ratcheted down" and Pyongyang will seek to defuse a "combustible situation."

But China is the variable here. On the outside the country seems as concerned as everyone else. Foreign Ministry spokesman Hong Lei said the China-North Korea border was being policed, and the country seems to be siding with the United States. But we must remember that North Korea is their ally. As Zhang said:

"China needs to seriously consider how to tackle the problem." China's relationship with Pyongyang is a delicate topic within China, since some believe Beijing's continuous support of North Korea could affect how the U.S. invests in the country financially.

As I mentioned throughout this article, a change in investment patterns in Eastern Asia could start at any time. Some analysts predict that if North Korea goes through with this, it will launch rockets on Monday morning to coincide with a national holiday.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.