The City of London does not do sentiment. We deal in yields, spreads, and the cold arithmetic of risk. So when President Xi Jinping touches down in Pyongyang for a state visit, the question is not about 'friendship' or 'leverage' – it is about what this costs the British taxpayer. And the early indicators are not encouraging.
Let us start with the obvious. North Korea is a nuclear pariah state that has, over the past decade, conducted six nuclear tests and developed missiles capable of reaching London – at least in theory. Xi's visit is the first by a Chinese leader in 14 years. It signals a shift from Beijing's traditional 'wait and see' approach to a more active role in managing the Korean peninsula. But here is the rub: China's interests are not ours. Beijing wants a stable buffer state, not denuclearisation. It wants to keep the US off its doorstep, not disarm Kim Jong-un. This is a relationship built on mutual utility, not shared values.
Now, for the UK, the implications run deeper than foreign policy jargon. The bond market is already pricing in a higher risk premium on UK gilts as global uncertainty mounts. A nuclear-armed North Korea that moves closer to China – and further from diplomatic resolution – tightens the screws on an already fragile global security order. That means higher defence spending, greater volatility in energy markets, and a long-term drag on productivity. All of which feed into the inflation that the Bank of England is fighting with rate hikes.
But here is where the City's scepticism kicks in. Talk of 'leverage' in Pyongyang is mostly hot air. China has limited influence over Kim's nuclear ambitions; the real lever is economic strangulation, not friendly visits. Xi's presence may grant temporary legitimacy to the Kim regime, but it will not slow the missile programme. The market knows this. It is why we have seen little movement in sterling or gilt yields on the news. The pound remains stuck in its range, and the 10-year yield hovers around 4.5 per cent. The message is clear: this visit is noise, not signal.
Of course, the Westminster chattering classes will spin this as a 'bold diplomatic move' and call for the UK to 'engage' more with China. They will point to the potential for trade deals or a 'new era' of cooperation. Do not be fooled. The UK's trade deficit with China is already bloated, and any increase in exposure to Beijing's strategic priorities is a liability. The hard numbers tell the story: UK exports to China fell 8 per cent last year while imports rose 12 per cent. This is a one-way street. And inviting the Chinese into the nuclear negotiation room only gives them more leverage over us.
What the market really needs is fiscal discipline. The Government is already borrowing at a spread over Germany that has widened by 30 basis points since January. A protracted crisis on the Korean peninsula – or worse, a conflict – would blow a hole in the Treasury's forecasts. The Ministry of Defence would demand more cash, the National Security Council would call for cyber investments, and the aid budget would face further strains. All of this adds to the gilt issuance that the BoE is trying to absorb. It is a recipe for stagflation, the City's oldest nightmare.
So where does this leave the British investor? In a word: watchful. The FTSE 100 has already discounted a 'no war, no peace' scenario. But the risk of miscalculation in Pyongyang is real. If Xi leaves without a concrete commitment to freeze missile tests, expect a flight to the dollar and gold. If the US ratchets up sanctions, expect energy prices to spike. And if the UK gets dragged into a broader conflict, expect gilt yields to spike and the pound to slide.
In the end, Xi's visit is a reminder that in global affairs, friendship is a commodity traded in the currency of power. The UK has little of that currency left after years of self-inflicted economic wounds. Our best hope is to fortify our own defences – fiscal, military, and diplomatic – rather than relying on the goodwill of a Chinese leader who answers to shareholders, not allies.
