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4 indirect consequences of North Korea's nuclear test, according to Eurasia

North Korea's recent nuclear test, its largest one to date, could have consequences for players ranging from South Korean cosmetics firms to Chinese banks.

Stringent new sanctions on the rogue nation are set to be the most tangible ramification from last Friday's incident, but the repercussions may go well beyond that.


Seismic waves observed in Seoul, South Korea, September 9, 2016.
Kim Hong-Ji | Reuters
Seismic waves observed in Seoul, South Korea, September 9, 2016.

"There are several market implications—affecting different asset classes in different countries—of the international reaction to North Korea's latest military activities," political risk consultancy Eurasia said in a note this week.

Chinese banks

Currently, mainland lenders are allowed to work with North Korean banks except those linked to the nuclear and missile programs. But as the international community expands the scope of secondary sanctions, they will likely proscribe any foreign bank from doing business with any North Korean counterpart, Eurasia said.

"This would involve designating Chinese banks that refuse to give up all their links to North Korea ...This step will undoubtedly produce major frictions with China."

South Korea consumption

Pyongyang's test makes South Korea's adoption of U.S. anti-ballistic missile system THAAD [Terminal High Altitude Area Defense] "a fait accompli," Eurasia said.

Joint missile defense cooperation as well as high-profile naval exercises between Washington, Tokyo, and Seoul are also likely.

"China will be incensed and object to any and all of this," Eurasia warned. "As THAAD deployment becomes a reality, this does not bode well for South Korean and U.S. relations with China."

Beijing remains opposed to THAAD due to national security concerns and may continue to express its objections by placing restrictions on its political and economic interactions with Seoul, Eurasia continued.

Earlier this year, stock prices of South Korean firms in consumer areas including tourism, cosmetics, and entertainment came under pressure when Beijing voiced its opposition to THAAD. As tensions increase, risks surrounding South Korea's consumer sector are set to rise again, Eurasia said.

South Korea regulations

Following Friday's nuclear test, South Korea's Financial Services Commission (FSC) and Ministry of Strategy and Finance announced plans to ramp up their surveillance of North Korea's actions and related market movements.

"The escalation of North Korean misbehavior will amplify pressure on South Korean financial sector regulators and businesses to improve their ability to respond to a major crisis on the peninsula," Eurasia said.

In the past, Pyongyang's past provocations have born little impact on South Korean markets.

But as expectations rise for more aggression— the country announced Thursday that it was ready to launch "another attack against the provocations of the United States"—there could be significant economic impacts in the future, the FSC cautioned.

Coal, iron ore

The two commodities are among North Korea's principal export items and according to a livelihood exception in current United Nations sanctions, Pyongyang is allowed to continue exporting coal to China. North Korea is Beijing's biggest supplier of anthracite coal, used for power generation.

But global powers are widely believed to adopt a more aggressive attitude towards Kim Jong-un's regime and may curtail exports.

"Washington and others will seek to close that livelihood exception and may even try to manipulate markets to make this coal expensive for Chinese importers," Eurasia stated.

"If the livelihood exception in the current United Nations Security Council resolution is closed or various actors seek to artificially increase the prices of North Korean exports, the supply of iron ore or coal to China could dip further."

Joshua Stanton, a Washington attorney and advisor to the U.S. House Foreign Affairs Committee, has suggested Pyongyang to continue exporting resources only if it buys aid or food in return.

"Don't close it [the livelihood loophole] completely; sanctions need safety valves in case of unintended humanitarian impacts," he said in Peterson Institute for International Economics (PIIE) blog post Wednesday.

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