Kim Jong-il’s sudden death, we believe, will likely add to investors’ concerns about the political and economic risks facing China and the rest of the region, at least in the short run.

Although the direct economic impact on China would be negligible, given heightened geopolitical risk, investors are likely to become cautious. This could contribute to a faster deceleration in investment in China and more capital outflows. It could also mean a tougher time ahead for the Chinese economy and greater pressure for CNY depreciation.

Faced with greater external uncertainty, Chinese policymakers may pay more attention to growth and stability instead of economic restructuring, and therefore lean more towards expansionary monetary and fiscal policies.

Kim Jong-il’s death might also open the door for North Korea to make the transition towards a market economy, either by gradual or radical methods. But North Korea’s success would critically depend on the response from other parts of the world as much as its own actions.


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