China's strategic interests after second Korean War
Israel is currently annexing Palestinian West Bank land, Russia has annexed 20% of Georgia, and NATO had indirectly annexed Serbian land by carving out Kosovo into an independent state.
Hence, as a matter of first principle, let's acknowledge that borders shift and China has an equal right to annex territory.
There are only a few rational choices for a post-war Korean peninsula.
1. After damage to both North and South Korea, let's restore the status quo. This is a terrible idea. China will have to provide even more food and energy aid (currently 45% and 90% respectively; see
The China-North Korea Relationship - Council on Foreign Relations) to keep North Korea functioning.
If North Korea screws it up again (Korean War 1950-1953, Second Korean War 2013-), China should basically "fire" the North Korean leadership. If you North Koreans are incapable of governing North Korea competently then we Chinese will do it ourselves.
2. The minimum outcome is a Chinese annexation of North Korea. Unnamed Sweeper Monk's proposal to divide North Korea with the United States/South Korea is unacceptable. His proposal stems from a position of weakness. China is the supreme Asian continental power and it will negotiate from a position of strength.
If South Korea is sufficiently damaged from North Korean atomic blasts then China should strongly consider annexing the entire Korean peninsula. At a minimum, China should threaten to annex South Korea if the United States refuses to go along with Chinese annexation of North Korea.
After the annexation of North Korea, the people of North Korea may choose to remain and become citizens of China. This is workable, because there are only a minuscule number of North Koreans at 24 million. Alternatively, North Koreans will be permitted to move permanently to South Korea if they choose.
3. Korean unification will not be permitted. There are twice as many South Koreans as North Koreans. Any unified Korea will bring the U.S. Army to the Yalu River. Unlike Gorbachev and NATO's betrayed promise not to extend its membership to the border of Russia, Chinese are not dumb enough to fall for vacuous Western promises.
In conclusion, it should be obvious that Chinese annexation of North Korea and possibly South Korea is the only viable outcome.