The Bank of England may want to check its gold reserves. Word from diplomatic circles confirms that Chinese President Xi Jinping is preparing for a rare state visit to Pyongyang, where he will meet North Korean leader Kim Jong Un. The British Foreign Office is bracing for what insiders describe as 'sensitive discussions' on nuclear disarmament. But if you think this will lead to a diplomatic breakthrough, you have not been watching the markets. The real story here is capital flight and the cost of geopolitical instability.
Let us be clear. This is not a friendly chat between old comrades. It is a signal. China is sending a message to Washington that it can play the North Korea card whenever it pleases. For London, this means one thing: volatility. The FTSE 100 has already dipped 0.3% in early trading, and gilt yields are edging higher. Investors hate uncertainty, and a nuclear-armed state cosying up to Beijing is the definition of uncertainty.
What can we expect? North Korea will likely demand sanctions relief in exchange for a freeze on its weapons programme. China, for its part, will want assurances that the US will not expand its military presence in the region. The British view is that any deal will be short-lived. We have seen this play before. Remember the Singapore summit? The Hanoi summit? Grand promises, no delivery. The only constant is that the West pays for the show through higher defence spending and reduced trade.
For the UK, the immediate impact is on the cost of borrowing. The 10-year gilt yield is already up 4 basis points this morning. If the summit goes wrong and North Korea tests another missile, you can bet the yield curve will steepen. The Bank of England will have to weigh inflationary pressures from higher energy prices against a potential flight to safety. They will probably keep rates on hold, but do not expect any dovish talk.
The real fear in Whitehall is that this meeting could legitimise North Korea's nuclear ambitions. The Foreign Office has been scrambling to coordinate a joint EU statement. But let us be honest: Europe has no leverage here. The only way to bring Pyongyang to the table is through China, and China charges a premium for its services. That premium is paid in trade concessions and diplomatic support.
What does this mean for the man on the street? Higher fuel bills, for a start. Any whiff of instability in the Korean Peninsula sends oil prices up. And if the summit leads to a breakdown in talks, you can say goodbye to any hope of lower inflation. The UK economy is already on a knife edge. The last thing we need is a geopolitical shock.
In summary, this summit is a distraction. It will produce a photo opportunity, a few platitudes, and then nothing. The markets will react, the Treasury will fret, and the rest of us will pay the price. But that is the cost of doing business in a world where China and North Korea dance their own dangerous tango.
