Bird Flu Concerns and North Korean Jitters

China has now confirmed 28 cases of infection with the bird flu virus H7N9. Eight people have died. The government has learned many lessons from the 2003 SARS outbreak and subsequent cover-up and so far the World Health Organization has publicly praised China’s handling of this new flu variant.

Liang Wannian, an official at China’s National Health and Family Planning Commission, told reporters Monday that “any doctors who fail to disclose cases promptly and accurately will be prosecuted.”

Beijing has allowed remarkable transparency in official and social media coverage of the H7N9 outbreak, though given its track record of information management many here doubt the apparent transparency. Managing pandemic fears in the social media age would test any government.

Living in Beijing, I have to hope the transparency is real. During the 2009 H1N9 outbreak, Beijing required schools and many public venues to check temperatures before allowing entry. As of this morning my kids’ school, a public Chinese elementary school, did not have the thermometers out. The Beijing Municipal Government appears to not yet be as concerned as it was four years ago about H1N1.

Yum Brands, owner of KFC, probably has reason to be concerned, as Chinese have been told to change poultry eating habits and there are reports of significant declines in KFC’s business in Shanghai, the city with the most reported cases.

This new virus has exposed at least one virulent pundit. Dai Xu, a Chinese Air Force Colonel and frequent, hawkish media commentator, has taken to Sina Weibo to claim that H9N7 is a U.S. conspiracy designed to sow panic. Many microbloggers have attacked Colonel Dai but he remains unbowed, writing this afternoon that his critics are “dogs” who “should be killed.” Do not be surprised to see Colonel Dai disciplined for these destructive diatribes.

The Korean Peninsula is a bit of headache for Beijing right now. First, researchers at Chinese Academy of Sciences say the likely source of the H7N9 mutation is a virus carried by wild birds that migrated from South Korea. Second, North Korea continues its escalating threats leading to concerns missile and nuclear tests may be imminent.

THREATS FROM NORTH KOREA are not new and historically have been used to shore up domestic control and extort aid while reminding the world of the threat Pyongyang poses with the goal of spurring engagement with the U.S. North Korea is neither “crazy” nor “suicidal” but Kim Jung-eun is a young, untested leader and the region is tired of these tactics.

China is North Korea’s closest ally and largest trading partner but it has less ability to shape Pyongyang’s actions than many believe. Beijing appears more frustrated with Pyongyang than any time in recent memory, but while there have been calls from scholars and some media outlets for a change in China’s policy toward North Korea there have been no official signs of a shift. Greg Kulacki, a China expert at the Union of Concerned Scientists, argues in a recent blog post that reports of a “subtle change” in China’s thinking about North Korea are exaggerated:

…the idea that China would change its policy on North Korea because of security concerns is so well-entrenched in the minds of U.S. officials and reporters that this “subtle change” in China’s thinking about North Korea was taking place in a 2003 episode of “The West Wing.”

President Xi Jinping of China said in a speech over the weekend at the Boao Forum that “no one should be allowed to throw a region and even the whole world into chaos for selfish gain”. Some interpreted President Xi’s ambiguous comment as targeted at North Korea, though it is more likely directed not just at the DPRK but also toward the U.S., Japan and other countries on China’s periphery.

China’s official position, as reiterated Monday by the Foreign Ministry spokesman is that “China opposes any action that would undermine peace and stability on the peninsula” and engagement and dialog through the six party talks is the only effective approach. Beijing wants neither a reunified Korea that is a U.S. ally or a failed state streaming refugees across its borders.

Expect it to work hard to return to the Korean Peninsula to the status quo. But a true provocation by North Korea that results in any armed response from South Korea or the U.S. might prompt the change towards Pyongyang that many hope Beijing is considering.

Investors should be concerned as the risks for miscalculations are increasing and costs of a Kim comedown increase every day he ratchets up the rhetoric. North Korea’s leader has invested much of his credibility in these recent threats; a retreat with nothing to show to his military and country could be very difficult.

However this current crisis resolves, it will provide yet another reason for countries around the reason to increase their defense budgets, and prove a boon for investors in defense firms with exposure to the region.