Two Koreas on the warpath, but bust-up will be defused

When all its friends started replacing heavy doctrine with something lighter, the ruling Kim dynasty remained committed to old-style communist dictatorship.

The two Koreas hosted the first battle of the Cold War when China and Russia locked horns with the US and UN forces. After both sides had fought to a standstill, two very different countries emerged. One became the Asian tiger of the late 20th century and the other a scratchy neighbour with a desperately poor population.

But apart from the odd skirmish on the border, North Korea largely maintained the status quo with its neighbours.

That was before it acquired that ultimate Cold War status symbol, a nuclear bomb. From then on, the eccentric neighbour became something more deadly. Not just to South Korea but also to China and Japan, who are too close for comfort when the wind is blowing in the wrong direction.

Things have remained tense ever since.

The sinking of a South Korean ship by the North was the latest in a series of incidents.

With 70,000 South Korean troops starting their annual exercises on Monday, it was almost inevitable that something would happen.

But never mind who started the present round of tit-for-tat, the most important question is how will it end?

Here in China, there was natural concern when the shells started flying yesterday.

It might be difficult for some to see how this strange country with its even stranger political structure can have an impact on the mighty Chinese economic machine.

But others view it as a volatile situation that one day could explode.

Although Beijing is very worried, the wider business community is taking a more sanguine approach. Rising prices and restrictions on bank lending top the agenda at home, with US monetary policy and European debt close behind.

Twenty four million impoverished inhabitants of North Korea and a few natural resources do not feature on the commercial radar.

Even the Shanghai stock market has been on the rise this week having digested the news.

The dangerously eccentric North Korean regime is probably beyond the immediate influence of even its most powerful neighbour.

But, despite obvious concerns, there seems to be really very little expectation here that this incident is going to blow up into a full-scale conflict. It is in nobody's interest.

North Korea has few friends left and no supporters of its nuclear capability. But, unlike other nuclear powers, it has one very strong card in its hand.

Some believe that it is just about crazy enough to use its nuclear weapon. That gives it leverage. There will be a lot of sabre rattling and maybe a few more shells but nobody actually wants the situation to escalate. And while the North has a nuclear deterrent, nobody believes it will.