Korea ChinaThe mysterious North Korean regime managed to rattle markets again this week. Markets sold off Tuesday after a volley of artillery fire killed two South Korean marines and set houses ablaze in the most flagrant act of provocation since Pyongyang had a South Korean naval vessel torpedoed last March.

Analysts are scrambling to decipher North Korea's motives. The most likely scenario is that the regime wants to get attention and draw world powers to the bargaining table where it can extract more concessions.

But for investors, a more consequential dynamic may be taking shape behind the scenes. The latest episode follows several hectic months in Asia where China's expanding economic might is quickly leading it to take center stage in regional politics. Ultimately, the showdown may boost Beijing's role as power broker in the region and could strengthen its hand when it comes to increasingly tense economic relations with the United States.

Geopolitical Issues

China has a complicated relationship with North Korea and the extent of Beijing's direct influence has been hotly debated. China provides plenty of symbolic support along with necessities like food and fuel.

But Pyongyang may ultimately have more leverage. A collapse in North Korea would eliminate an important buffer zone and could allow U.S. troops to easily reach its southern along with unleashing a refugee crisis.

Analysts note that China seemed genuinely surprised by the recent barrage, and the North Korean move comes ahead of high-level meetings between China and the U.S.

"China is, no doubt, embarrassed by North Korean provocations in advance of President Hu Jintao's mid-January visit to Washington," analysts at political risk consultancy The Eurasia Group wrote in a note to clients. "Worse, the incident has again shown that Beijing is either unable or unwilling to restrain Pyongyang."

But as the U.S. and China compete for influence in the region, the development could give Beijing an advantage nonetheless. So far, China has remained supportive of North Korea, much as it was in March even as international outrage mounted over the sinking of the South Korean naval vessel.

The United States, after all, has limited means of influencing North Korean aggression and must use China as an intermediary. And along with South Korea, any exchange will serve as a litmus test for the ability of the U.S. to support the interests of other regional allies like Taiwan and Japan.

Tensions Rising

China, meanwhile, has plenty of concessions to seek in exchange for pressuring Pyongyang. Tensions have been escalating lately, with the U.S. becoming increasingly aggressive about the jobs that China's undervalued currency allows it to siphon off. At the same time, China complains that the U.S. is pursuing manipulative policies that could lead to inflation in the developing world.

Japan, another U.S. ally, has also seen rapidly escalating tensions with China. Earlier this month, Japan dispatched troops to disputed islands in the East China Sea that may be rich in natural resources. The move follows a bitter showdown after a Chinese fishing boat rammed a Japanese naval vessel and China informally clamped down on vital rare earth metal exports to Japan.

That, in turn, led to a new collaboration between Japan and India in the development and reuse of rare earth metals. This week, Japan's largest importer of rare earth metals turned to an Australian company to form a "strategic alliance" to secure future supply. Beijing's moves, in other words, are having a rippling effect across the region.

The rapid rise in the Chinese economy was accompanied by much wishful thinking. An ideal trading partner that was almost fused with America, China wished only to keep its factories humming as its wealth expanded, according to the popular view that emphasizes China's "peaceful rise."

But Beijing is proving itself shrewd rather than docile on the international stage time and again. And it will likely look to further its own agenda as tensions mount again on the Korean peninsula.

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fredlynn07

Stop all imports from China until North Korea signs a non aggression pac. This will allow direct retailiation from the South if attacked again without war. It will also show our power over China. Second, the US ederal gov. should put money into rviving our manufacturing industries. It will further shake China and put US workers back to work. I know the GOP will complain, but they've complained before about GM, which is paying us back plus interest.If we invest in ourselves, we can still be winners. Believe!

November 26 2010 at 11:40 AM Report abuse +2 rate up rate down Reply
spike

Teddy Roosevelt ,famous for his charge up San JUan hill, thought war was glorious and wonderful;something every youing man should experiance.Then his son quinton got killed on the battlefield in WW1.Teddy changed his mind and grieved the loss of his son for the rest of his life.War is sometimes nessisary,but;its only glorious and wonderful when someone else is fighting it.

November 26 2010 at 10:35 AM Report abuse rate up rate down Reply
spike

Maybe if we let the rich tax breaks expire,we can buy our country back from China.Of course capitalism cares not about patriotism or nessisarily even freedom,but;money ,money,money.Capitalism is good when it works for you,but ehhh,maybe its working better for china then america,these days.

November 26 2010 at 10:23 AM Report abuse +2 rate up rate down Reply
erink91321

Forget China being a Power Broker for Americas Benefit. China has Long used North Korea as a Testing Point with America and has supported and allied with the North since 1950. Just a couple of weeks ago a Chinese Submarine Launched a Missle just off the Coast of California ahead of the G20 Meet and the recent Action by the North seems to back up somthing big that is brewing. I wonder how they view the Myan Calander of 2012

November 26 2010 at 8:52 AM Report abuse +1 rate up rate down Reply
Lyloks

Kumar needs to go to White Castle and get a bag of munchies (to much wacky weed) if he thinks that China can control North Korea

November 26 2010 at 8:24 AM Report abuse -2 rate up rate down Reply
ronsjigslures123

I have lived threw a couple big wars and let me tell you the tail end of WW2 this country was in really bad shape, same with Viet-nam .. wars only create hardship for all. Trying to build back a countrys ecconomy these would take many years, and make this recession look like a childs tea party, Unless you have lived threw it and lived you its your worst mitemares. Countrys ecconomys are shot to heck, and i mean really shot.

November 26 2010 at 5:29 AM Report abuse rate up rate down Reply
ronsjigslures123

The best action is to sit down with them and figure out what they want, the USA has some so called good forien advisers and have people in other countrys that can talk out the problems, and make a deal. War is not a option in this country and many others right now, wars these days cost hundreads of billions to a couple trillion, i don,t know about you BUT I DON,T WANT MY GRANDKIDS PAYING OFF THAT KIND OF DEBT, they will end up with nothing for all the years work they do to make a good life for themselfs and there familys.

November 26 2010 at 5:22 AM Report abuse +1 rate up rate down Reply
ronsjigslures123

I like the way some says bomb them or we have to take action. Get real we get into another war and we will be 30 trillion in debt in no time, and i hate to tell you this is the year 2010 you can,t just kill thousands of women and childrean because of a goveremnt leader want,s a fight, things don,t happen that way any more, and we the USA would be crusafied in the eyes of all the rest of the world. Why don,t you think we just didn,t send in a million tons of bombs in Iraq some tears ago, because of the population.

November 26 2010 at 5:17 AM Report abuse rate up rate down Reply
Alan

The United States must act after the North Korea's bombing of South Korean land. If we don't act we look like we're scared to take action. Now we can look forward to ever more increasing threats from North Korea. Do they have to nuke the United States for us to do anything at all? We've all but walked away from our commitments in the region. The longer we wait the worse off we're all going to be when we finally get around to doing something if ever. North Korea was making more noise before our invasion of Iraq than what they're doing now. Only now they're bombing South Korea. Seems like in the past they've made noise and we've appeased, every time. The North Korean's seem to be telling us what to and we do it no questions asked.

November 26 2010 at 2:44 AM Report abuse rate up rate down Reply
too3729

china and n korea is playing america and s. korea as suckers...

November 26 2010 at 2:34 AM Report abuse +1 rate up rate down Reply