North Korea is the micro topic of the moment when it comes to security issues in our Asia game theater, but there are also territorial disputes regarding the South China Sea and potential brinksmanship between China and the United States. My recent research trip to Asia provided some insight into these situations.

Kim Jong-un continues to demonstrate China’s lessened ability to control him.

First, in North Korea, Kim Jong-un continues to demonstrate China’s lessened ability to control him. Despite potential for discussions between the United States and China regarding this matter, it is unclear what is even in the realm of possibilities when it comes to agreement on bottom-line objectives.

The United States wants North Korea to stop developing its nuclear capability, and North Korea does not want to stop developing it. Sanctions that cut off funding slow North Korea, but won’t halt it. And if Kim Jong-un is removed from power, there would likely be a flood of refugees into China, the potential for a reunified Korean peninsula aligned with the United States, and/or a wildcard as Kim Jong-un’s successor. China does not like any of these possibilities.

The climate is more favorable for China in other areas. Moving on to the South China Sea, disputes involve both island and maritime claims among several sovereign states within the region, and there are many non-claimant states that want the South China Sea to remain as international waters. One reason: trillions of dollars’ worth of global trade pass through the body of water. Another is defense: China sees itself surrounded by U.S. allies across the waterways looking east.

China is thus creating and developing islands in the South China Sea and other nations are objecting. The Philippines seemingly capitulated to China by backing off on the intensity of its dispute of island claims. Instead, the Philippines agreed to pursue joint development with China. This has been China’s long-standing strategy: develop together and worry about claims later.

Chinese President Xi Jinping’s goal is to buy time, slow down, and dilute any U.S. actions with counterpunches.

Lastly, China has been studying President Donald Trump’s trade and security plans. President Xi Jinping’s goal is to buy time, slow down, and dilute any U.S. actions with counterpunches. The consensus is that China will not initiate or escalate, but will certainly hit back. China is already adept at this practice, and has had longer to think about it than Trump’s team. While acknowledging the risk of a large trade or security scuffle, China feels good about its chances of outmaneuvering an undisciplined player.

As I mentioned previously, China and the United States are the big players in the region, and the United States’ coalition power has decreased. That said, Japan, in particular, appears particularly keen to affirm their partnership with the U.S. with respect to security, and we’re likely to see further mutual commitments there.

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Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

Copyright © 2017 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

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