There are no good options here. But a few points deserve to be made:
1. This is a failure for Chinese diplomacy. The Chinese have a strong interest in reducing tensions between the North and the South, if only to ensure that the United States does not need to be as strong a presence in Asia. Instead of working actively to get the North to behave, the Chinese have passively watched as the North has ratcheted tensions upwards. This means a stronger American presence in the region, and rumors that American tactical nuclear weapons might be reintroduced to the region–none of which bodes well for the ability of the Chinese to project power without worrying about the presence of a competitor for the position of regional hegemon.
2. This is typical posturing on the part of the North, and as the Administration has pointed out–not without reason–it is a reaction to South Korea’s turn in the spotlight when it had the chance to host the G20 summit recently. When something favorable happens to South Korea, North Korea feels as though it needs to throw a temper tantrum. That having been written, there is plenty about this episode to cause reasonable people to worry deeply about the state of affairs between North and South Korea.
3. Pledges to defend South Korea are fine and good, as are promises to hold military exercises. But something has to be done to effectively deter the North from further acts of aggression. Short of war, we have nothing in our toolbox.