> NK isn't some rationalistic actor.
North Korea is rational. They have a very good idea of how far they can annoy everyone else before it starts to hurt them, and they have proven very adept at being able to extract concessions from the rest of the world.
> The NK problem can never ever be solved by diplomatic resolve.
The only way the problem could be solved diplomatically is a grand bargain between China and the US (maybe Russia as well, but China is definitely required) to let the Kim government fall.
> Personally I think while China's interests are in maintaining a peaceful region, we must be wary of the relationship between NK and China. As there is a possibility of another game being played. Perhaps China wants to annex NK.
The real problem with North Korea, and the reason we're in this dangerous unstable equilibrium is that, as much as the relevant powers hate the current situation, the alternatives are even more unpalatable. No one wants to take on the task of absorbing North Korea--China and South Korea are already too rich (the gap is even wider than East/West Germany, and that took 20 years to close). Furthermore, China already has a rural-to-urban migration problem, and North Korean refugees would only exacerbate that issue.
War with North Korea would be a very unpalatable situation. The center of Seoul is only about 30 miles from the North Korean border, and some suburbs are even closer--within artillery range of the border. That gives North Korea the ability to raise the death count to over a million people in a very short amount of time even before rockets or nuclear weapons are involved, not to mention instigating a short-term refugee situation that makes Syria's look small. Furthermore, North Korean rocketry and nuclear weapons gives it the ability to threaten the megacities of Japan, and if Kim Jung Un feels he can't win, he very well could go out with a painful bang.
Put more simply, a war with North Korea, although likely very short, could easily produce a death toll commensurate with World War I. A military option is not a good option. There are no good options when it comes to North Korea. At this point, the least bad option to me is to ignore North Korea's tantrums, publicly reaffirm commitment to the defense of South Korea and Japan in the event of a war at any cost, and quietly work with China to develop post-Kim scenarios.