Most of the noise following North Korea's missile test in early July emanated from diplomatic circles, but it was investors across Asia who took the biggest hit. When the missiles sank in the Sea of Japan they dragged stock markets down with them.
Despite – or maybe because of – international warnings, intractable dictator Kim Jong-il launched his missiles and provided a perfect case study for one potential risk investors in China face. This kind of external risk is virtually impossible to manage.
"I think there are numerous risks in any Asian country for an investor ? In China, the major and most serious external risk, I would think, is a miscalculation on Taiwan by all sides," said Chris Runckel, president of consultancy Runckel & Associates and a former diplomat with long experience in Asia. "Taiwan and the Korean peninsula are both flashpoints."
The potential problems with Taiwan and North Korea are well known but the list of possible pitfalls is as long as the imagination is rich: trade disputes, new quotas, tariffs on products made in China, logistical snags, bottle-necks at ports around the world, changes in the national political climate in any of hundreds of countries, the need for politicians to get elected in the US, the need for politicians to get elected in Europe, the emergence of cheaper markets in India, the emergence of more accessible markets in Mexico, revolutions in a myriad African countries.
Some of these risks fall under the category of flights of fancy while others could quite feasibly arrive with tomorrow's newspapers – but all of them are worthy of consideration and even planning.
"The vast majority of companies don't do this incredibly well," said Dr. Liam Hoon Lim, a principal at consultant A.T. Kearney. "It's like insurance. You don't really need it until something happens."
The impact of the North Korea's missile test was all too visible.
The missiles, including one that could potentially reach targets in America, were launched on July 4. As the news emerged less than 36 hours later, investors across Asia moved their money out of stock markets and into secure investments like gold.
The exodus from bourses across the region pushed the Hang Seng Index down 0.62%. And there was virtually nothing anybody could do about it.
Given the interconnected nature of the world, unilateral actions by a single government can trigger chain reactions around the world. In the run-up to Congressional mid-term elections later this year, more than a few US politicians are likely to try and score points with constituents by promising to take action against Chinese manufacturing to preserve American jobs, regardless of whether such a proposal would render any material gain.
"Politicians obviously have a tendency to oversimplify issues to gain short-term political capital," said Justin Lowes, of Beijing-based Lowes Wealth Management. "Sadly, the press, society, politicians focus on simplistic issues."
Two days after the North Korean launches, Europe issued an ultimatum and threatened new tariffs and quotas on Chinese goods if Beijing did not open its doors further to European exports.
From textiles to sports shoes and furniture to plastic bags, a wide variety of products have made headlines as the latest bone of contention between China and the US or China and Europe. Often, however, protectionism is driven by public perception.
One example of this is the US Senate bill sponsored by Democrat Senator Charles Schumer and his Republican counterpart Lindsay Graham, which calls for the imposition of a 27% across-the-board tariff on US imports from China if there is not significant appreciation in the yuan.
Such a bill would likely hurt the wallets of consumers across the US more than it would help them, but that is hardly the point. The crux of the issue is this legislation may get widespread backing by riding a wave of anti-China sentiment that is not necessarily rooted on solid fact.
"These sentiments may not even be rational, but they are there nonetheless," said Philip Leung, China Business Committee chair at the American Chamber of Commerce in Hong Kong. "Some of the rationale we've heard is ridiculous, but it isn't ridiculous to [the public]."
Public perception is a rather fickle animal and the chances of a business operating in Dongguan or Tianjin having the clout to influence opinion in Europe or the US are rather small. On the other hand, public perception in the US or Europe could seriously disrupt sales at a T-shirt manufacturer or a small electronics firm if it helps lobby groups push individual governments to erect new quotas or trade barriers.
Europe's complaints, protectionist legislation in the US or Kim Jong-il's rocket launches represent potentially expensive operational threats outside the sphere of control of investors and businesspeople in China.
"Good planning requires that you think about things not going right, and perhaps going into crisis," said former diplomat Runckel. "Thinking about how your company would respond, and putting this in writing and sharing this with others in your company is always a good management practice."
The missile launch in North Korea was not unexpected. The government had been making veiled threats about testing a long-range missile for some time, while the US had been adamant that any such test would be a bad move. Still, when the missiles went up, stocks went down.
"The world market is at a point where it is highly uncertain," said Leung.
For many light industries, the potential of interference from abroad does not even enter the list of risks they examine. Local economic and labor issues take much higher precedence.
Still, China is the third largest trader in the world. Its ratio of imports to GDP is double the US at 30% and its trade surplus with the rest of the world hit US$102 billion in 2005. Any factor that may significantly affect foreign trade can seriously impact markets but, ultimately, it may be difficult to develop a single strategy to deal with these widespread risks.
When it comes to geo-politics, beyond being aware, the only solution is to consider a scattergun response strategy, spread the eggs around the baskets and keep an eye on business fundamentals.
"If these fundamentals are in place, the risks are small compared to the market potential," said Leung.
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