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Here's the Real Danger With North Korea

A South Korean soldier stands at a military check point connecting South and North Korea at the Unification Bridge in Paju, South Korea.
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A South Korean soldier stands at a military check point connecting South and North Korea at the Unification Bridge in Paju, South Korea.

Repeated threats of aggression from North Korea have created little panic in Asian markets, with many investors interpreting the reclusive state's saber rattling as merely an attention-seeking ploy.

But rising tensions on the Korean peninsula should not be taken lightly, say experts, noting that there is a risk of miscalculation by both North and South Korea if the 30-year-old Pyongyang leader, Kim Jong-un, pushes the boundaries too far.

(Read More: North Korea Warns Foreigners to Leave South)

South Korea's benchmark Kospi Index rose almost one percent on Wednesday - its third straight day of gains - paring some of the losses seen in the previous week after North Korea declared it has entered "a state of war" with the South. Other equity markets in the region have not reacted dramatically, with Japan's Nikkei 225 extending gains this week on optimism over the Bank of Japan's aggressive monetary easing and China's Shanghai Composite edging down marginally on domestic factors including worries over a bird flu outbreak.

But experts point to the risk of underestimating Kim Jong-un's threat. "There is a risk that North Korea doesn't know where the red line is, and they engage in provocations which turn into a full scale conflict," said Patrick Chovanec, chief strategist at Silvercrest Asset Management, adding that the new leader's inexperience is a concern.

Tensions between the North and South escalated further on Wednesday following local media reports that Pyongyang has moved one or more long-range missiles in readiness for a possible launch.

(Read More: South Korea Boosts Surveillance as North Moves Missile)

This followed a warning by Pyongyang a day earlier, telling foreigners to leave South Korea to avoid being dragged into a "thermonuclear war." Adding to this, North Korean workers failed to turn up at the Kaesong Industrial Complex, jointly operated with the South, bringing operations to a halt on Tuesday.

"We need to take it very seriously. We're always on a knife edge of a crisis on the peninsula. Of course many threats are never really carried out, but we do seem to be entering new territory here, new threats, more specific threats, a lot more threats in a truncated period of time than is the norm," said Bruce Klinger, senior research fellow for the Heritage Foundation.

Klinger added that his biggest concern is that Pyongyang may engage in a "tactical" attack near its disputed sea border with South Korea, citing the sinking of a South Korean military vessel by a North Korean submarine's torpedo in 2010, or along the "demilitarized zone" - a strip of land that runs across the Korean Peninsula that demarcates North from South Korea.

"He [Kim Jong Un] visited the area, he's moved down artillery units, he specified South Korean military units and islands by names, so it's more likely to start there. But there is also greater danger Kim Jong Un will miscalculate, and certainly South Korea is likely to retaliate this time," Klinger added.

(Read More: North Korea to Become the Next Iran: Citi)

Another possibility is that the North could launch a cyber-attack, he said. A South Korean probe into the massive cyber-attack on several of the country's banks and broadcasters in March found North Korea's military agency behind the attack, according to media reports published on Wednesday.

Where's China in All This?

Aside from China's criticism of provocations by its longtime ally, Beijing has failed to use its influence to halt an escalation of aggression demonstrated by North Korea, said experts.

The problem is China is very reactive and would rather maintain status quo on the Korean peninsula, said Chovanec.

"There's a debate taking place in China for the first time on whether North Korea is an asset or a liability...some hopes have been expressed that China is going to crack down on North Korea...I'll believe that when I see it," he added.

(Read More: Despite Tough Talk, China's North Korea Options Limited)

Klinger too expressed skepticism over whether China will change its attitude towards North Korea.

"It [China] has really shown itself to be more part of the problem than part of the solution. They turn a blind eye to North Korean proliferation, and by engaging economically, they really undercut any incentive for North Korea to go back to the six-party talks," he said, referring to the talks held by China, Japan, North Korea, Russia, South Korea, and the United States on dismantling North Korea's nuclear program.

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