Chinese President Xi Jinping’s planned visit to Pyongyang has triggered urgent assessments within British intelligence circles. The trip, the first by a Chinese leader in over a decade, is being scrutinised for its potential to destabilise an already fragile regional security architecture. The timing is particularly concerning, coming as North Korea accelerates its ballistic missile tests and rhetoric against the West.
From a fiscal perspective, this visit represents a significant bet by Beijing. The cost of propping up the Kim regime is rising, with China’s trade with North Korea increasing 40% year-on-year to $2.8 billion in the first half of 2024. However, the strategic returns are questionable. The Chinese yuan is under pressure, capital flight is accelerating, and the People’s Bank of China is walking a tightrope between stimulating growth and containing inflation.
The market reaction has been muted so far, but gilt yields are ticking up in London as investors price in geopolitical risk. The FTSE 100 is flat, but defence stocks are rallying. This is a classic flight to safety, but with a twist: the safety is not in government bonds but in hard assets and cash.
British intelligence assessments suggest the visit may be aimed at securing North Korean support for Chinese positions on Taiwan and the South China Sea. However, the risk of a nuclear provocation during the summit cannot be discounted. The Foreign Office has issued a travel warning for the region, but the real concern is the potential for a miscalculation that could trigger a broader conflict.
In the City, the consensus is that this visit will further isolate China from Western financial markets. The recent crackdown on foreign investment and the weakening of property markets have already reduced China’s appeal. A close embrace of Pyongyang will only accelerate capital outflows.
The bottom line: This visit is a gamble that Beijing may lose. The costs are mounting, and the returns are uncertain. For investors, the message is clear: diversify, hedge, and buckle up. The geopolitical clock is ticking, and it may be counting down to a crisis.
