With American secretary of state Hillary Clinton underway to the East Asia, a crisis is looming in the waters of the Yellow Sea where a South Korean corvette sunk last March, killing 46. South Koreans authorities have ascertained that a North Korean torpedo was responsible for the sinking. The North has denied any involvement, threatening with “all out war” should the South respond militarily. The White House agreed that the sinking constituted an “act of aggression” that is “one more instance of North Korea’s unacceptable behavior and defiance of international law.”

The ROKS Cheonan went down near the disputed inter-Korean maritime border on March 27. Tensions flared between the two Koreas that remain formally at war but the issue faded until this Thursday when international investigators, including experts from Australia, Britain, Sweden and the United States, found that the remains of the torpedo that sunk the Cheonan “perfectly match” those of a CHT-02D torpedo which North Korea sells abroad. What’s more, markings were found similar to those engraved on a previously recovered North Korean torpedo.

“The discovery,” reports The Economist , “combined with intelligence reports indicating North Korean submarines were out of port during the attack, allowed the investigators to conclude on May 20th that the Cheonan ‘was sunk as the result of an external underwater explosion caused by a torpedo made in North Korea.'”

The news has sent shockwaves through the region with South Korean President Lee Myung-bak announcing “firm, responsive measures against the North.” South Korean stocks and currency plummeted on Thursday amid mounting fears of a renewed confrontation.

It will become harder for North Korea’s sole, though lukewarm ally in the region, China, not to accept the regime’s culpability. A senior official in Beijing reportedly called the incident “very unfortunate” while The Wall Street Journal quotes a Chinese Foreign Ministry spokesman as calling on all parties to “stay calm and exercise restraint — to avoid escalation of the situation.”

Secretary Clinton is set to meet officials in Beijing on Monday and Tuesday in what are likely to become some pretty uncomfortable diplomatic meetings for the Chinese. Previous attempts to impose UN sanctions on North Korea have been thwarted by the belief that China would veto them. With the regime in Pyongyang so unmistakably exposed an an aggressor in recent days, Chinese leaders will be hard pressed to maintain their position when they confere with their Japanese and South Korean counterparts on May 29 and 30. So far, China has only supported economic penalties against the North, reluctantly.

In the wake of the Cheonan sinking, North Korean leader Kim Jong-il made a hasty trip to Beijing to beg for continued economic support. “At that point, Beijing had an excuse,” according to The Economist , “in public at least, to take his claims of innocence at face value. It no longer does.”

Beyond diplomatic measures, South Korea’s retaliatory options are limited. The country may break remaining business ties with the North or close off a shipping shortcut to North Korean vessels though considering the regime’s bellicosity in response to the incident — “Our army and people will promptly react to any ‘punishment’ and ‘retaliation’ and to any ‘sanctions’ infringing upon our state interests with various forms of tough measures” — and the danger of the United States being dragged into a new war between the two Koreas, it seems more likely that former businessman turned president Lee won’t push for aggressive measures that threaten to upset politicos in the Hermit Kingdom.

The South Korean people don’t seem into a fight either, notes The Economist . “Indeed, despite a national outpouring of grief, the senseless attack aroused surprisingly few public demonstrations of wrath with the North.”

With an election for local and provincial seats scheduled in less than two weeks, the incident has been caught up in the political fray. The opposition alleges that Lee and his ruling party timed the investigation to influence voting on June 2. In either event, the president may expect to gain victory which economically, at least, is good news for the South which has expertly weathered the global turndown under Lee’s leadership.