North Korean Economy Watch

The Choson Ilbo reports:

The [Wikileaks] cables say that North Korea received the arms payments through the Seoul branch of Iran’s Bank Mellat and that the U.S. government urged the South Korean government to investigate the matter. According to a cable dated March 24, 2008, a company in Iran called Hong Kong Electronics wired $2.5 million in three separate payments from Parsian Bank in Iran to the Seoul branch of Bank Mellat in November of 2007. Hong Kong Electronics is a paper company owned by North Korea’s Tanchon Commercial Bank. The money was wired entirely in euros, and $1.5 million worth of the payment was then wired to accounts in China and Russia.

Following a U.S. request to investigate, the South Korean government probed the Bank Mellat branch in December 2008 but did not take any punitive measures. Washington then demanded that the branch’s assets be frozen, according to a cable dated May 12, 2009.

The Iranians deny the accusations.  According to the Joongang Ilbo:

Iranian Foreign Ministry Spokesman Ramin Mehmanparast rejected allegations that Iran transferred a large sum of money via the Seoul branch of Iran’s Bank Mellat to buy North Korean arms.

In an exclusive interview with the JoongAng Ilbo on Friday at the Iranian Embassy in Seoul, Mehmanparast stressed that Bank Mellat’s Seoul office ran its business “under the supervision of South Korean financial authorities.”

Iran’s new ambassador to South Korea, Ahmad Masoumifar, sat in on the interview.

Mehmanparast was in Seoul with seven Iranian journalists to improve relations with the Korean Ministry of Foreign Affairs and Trade.

The South Korean government in September slapped tough sanctions on Iran for its nuclear program, with penalties including the suspension of virtually all financial activities at the Seoul branch of Iran’s Bank Mellat.

The South Korean government said its actions complied with United Nations Security Council resolutions.

Q. Cables released by WikiLeaks suggested that North Korea likely received payment for weapons sold to Iran through Bank Mellat’s Seoul Branch.

A. I think there’s someone behind the allegations in regard to Wikileaks’ information on Iran. Bank Mellat operates abiding South Korean law. There’s nothing wrong with the bank. We do maintain diplomatic ties with the North Korean government. But Iran doesn’t damage (diplomatic) relations with one country for the sake of relations with another country.

Q. What about allegations that Iran and North Korea are cooperating on nuclear technology?

A. Iran and North Korea aren’t in a military alliance. Frankly speaking, when it comes to nuclear weapons, Iran doesn’t need other countries’ assistance.

Iran’s young scientists are in the process of successfully developing technology to use nuclear power in a peaceful manner.

Q. What’s Iran’s official position on North Korea’s attacks on the South Korean warship Cheonan and Yeonpyeong Island?

A. It was heartbreaking when I heard the news about the Yeonpyeong attack. I hope peace is maintained in Asia. I want to again stress peace through dialogue.

Q. Iran is an oil rich country. Why does it need nuclear power?

A. The Western media also questions why Iran needs nuclear power. But when you look at the world’s latest economic trends, nuclear power is (increasingly important) when used in a peaceful way. Even the United Arab Emirates began nuclear cooperation with the South Korean government.

Crude oil will be depleted in the future. Nuclear power is an answer to that, and it’s necessary for environmental reasons, too.

Q. Former Iranian Ambassador to Korea Mohammad Reza Bakhtiari said in a previous interview with our paper that Iran won’t sit back and watch if the South Korean government joins international sanctions against Iran.

A. That’s an uncomfortable question to answer. South Korea and Iran have lots in common as Asian nations. I hope for South Korean companies’ prosperity in Iran and I also hope for the success of Iranian companies in South Korea.

I hope short-term political pressures won’t hurt our bilateral relationship.

Read the full stories here:
N.Korean Arms Payments ‘Passed Through Seoul’
Choson Ilbo
1/18/2011

‘Bank Mellat didn’t pay for arms from North Korea’
Joongang Ilbo
Chun Su-jin
1/24/2011

Pictured above: Paek Son Haeng Memorial Hall, Pyongyang (Google Earth)

According to the Daily NK:

North Korea has apparently agreed to accept foreign funding to produce a movie which shows Christians in a positive light. It will be the first movie made in North Korea to show the life story of a Christian.

An activist working in New Zealand for “Team and Team International”, a South Korean NGO working on international disaster relief, reported today, “A North Korean movie import-export company (Chosun Movie Company) has decided to produce a movie, ‘Paek Sun Haeng’, with the support of an organization from New Zealand,” and added, “They are at the last stage of working on the scenario and plan to start filming this coming September.” A budget production, it will cost a reported $1.5 million.

The activist said that the two sides have agreed to show the movie in movie theaters across the country and on Chosun Central TV. The purpose behind the investment is apparently to depict the positive side of Christianity and Christians to the North Korean people.

He explained, “Based on the idea that the figure, Baek Sun Haeng, has been defined as a good capitalist in North Korea, the organization has been negotiating production of a movie about her with North Korea since 2008.” Additionally, he said “They will describe fully the image of Baek as a philanthropist as well as a Christian in the movie.”

The scenario was reportedly written by the head of Chosun Movie Company, Choi Hyuk Woo, but there has been conflict over the degree of Christian content.

The source explained, “Problems when the North Koreans tried to change one line or scene have not been small.” However, “They were able to persuade the North Korean staff by sticking stubbornly to the fact that it would have been impossible to invest in the movie without Christian content.”

North Korea’s bad situation vis a vis foreign currency may have influenced the North’s decision-making, the source agreed, saying, “I am aware that North Korea’s internal capital situation is rather difficult. That economic difficulty may have influenced this contract somewhat.”

Chosun Movie Company oversees the export and import of movies under the Culture and Art Department of the Propaganda and Agitation Department, which is within the Central Committee of the Party.

The activist emphasized, “Aid activities for North Korea should give dreams and hope for new things to the North Korean people through diverse cultural approaches beyond food or essential aid.”

The movie’s main character, Baek Sun Haeng (1848-1933) is a well-known philanthropist in North Korea who has been mentioned in North Korean textbooks, in Kim Il Sung’s memoirs and elsewhere.

After her husband died when she was 16 years old, she is said to have accumulated wealth relentlessly. After that, she built both “Baek Sun Bridge” across the Daedong River and a three-story public meeting hall in Pyongyang. She also donated real-estate for Pyongyang Gwangsun School and Changdeok School.

Baek, as the deaconess of a church, also contributed to the education of Korean Christians by donating capital and land for Pyongyang Presbyterian Church School, which was built by Rev. Samuel Austin Moffett, the then-reverend at the First Church of Pyongyang, and Soongsil School, the forerunner to Soongsil University in Seoul, which was established by Dr. W. M. Baird, an American missionary, in Pyongyang on October 10th, 1887.

Additionally, she dedicated all of her property to an organization dedicated to the relief of poverty in 1925, so the Japanese government general tried to present her with a commendation, but she refused it. Therefore, she has been praised highly as a “people’s capitalist” in North Korea.

In 2006, the North Korea media reported that an existing monument to Baek had been restored and moved into “Baek Sun Haeng Memorial Hall” in Pyongyang on the instructions of Kim Jong Il.

Read the full story here:
Christian Movie Being Shot inside North Korea
Daily NK
1/17/2011

UPDATE: China denies sending troops to the DPRK.  According to the Global Times:

A Chinese government official Sunday dismissed a report by a South Korean newspaper that China was sending troops to North Korea.

“China will not send a single soldier to other countries without the approval of the UN,” an official at the Chinese Ministry of Defense told the Global Times on condition of anonymity, citing China’s basic policy on troop deployment.

ORIGINAL POST BELOW: According to the AFP:

China is in discussions with North Korea about stationing its troops in the isolated state for the first time since 1994, a South Korean newspaper reported Saturday.

The Chosun Ilbo newspaper quoted an anonymous official at the presidential Blue House as saying that Beijing and Pyongyang recently discussed details of stationing Chinese soldiers in the North’s northeastern city of Rason.

The official said the soldiers would protect Chinese port facilities, but the location also gives access to the Sea of Japan (East Sea), while a senior security official was quoted as saying it would allow China to intervene in case of North Korean instability.

A spokeswoman for the Blue House said she had no information, while China’s defence ministry declined comment to AFP on the matter this week.

“North Korea and China have discussed the issue of stationing a small number of Chinese troops to protect China-invested port facilities” in the Rason special economic zone, the unnamed official was quoted as saying.

“The presence of Chinese troops is apparently to guard facilities and protect Chinese nationals.”

China reportedly gained rights in 2008 to use a pier at Rason, securing access to the Sea of Japan (East Sea), as North Korea’s dependence on Beijing continues to grow amid a nuclear stand-off with the United States and its allies.

The last Chinese troops left the North in 1994, when Beijing withdrew from the Military Armistice Commission that supervises the truce that ended the 1950-53 Korean war.

Seoul’s International Security Ambassador Nam Joo-Hong told the Chosun Ilbo that China could now send a large number of troops into the North in case of instability in the impoverished communist state.

“The worst scenario China wants to avoid is a possibly chaotic situation in its northeastern provinces which might be created by massive inflows of North Korean refugees,” Nam was quoted as saying.

“Its troops stationed in Rason would facilitate China’s intervention in case of contingencies in the North,” he said.

Here is the original report in the Choson Ilbo (in Korean).

UPDATE: The Choson Ilbo posted a story in English which claims the Chinese soldiers are already in North Korea:

Chinese troops have been stationed in the special economic zone of Rajin-Sonbong in North Korea, sources said Friday.

This would be the first time since Chinese troops withdrew from the Military Armistice Commission in the truce village of Panmunjom in December 1994 that they have been stationed in the North.

“Pyongyang and Beijing have reportedly discussed the matter of stationing a small number of Chinese troops in the Rajin-Sonbong region to guard port facilities China has invested in,” a Cheong Wa Dae official said. “If it’s true, they’re apparently there to protect either facilities or Chinese residents rather than for political or military reasons.”

How many of them are there is not known. The move is unusual since North Korea is constantly calling for U.S. forces to pull out of South Korea and stressing its “juche” or self-reliance doctrine.

A China-based source familiar with North Korean affairs said, “In the middle of the night around Dec. 15 last year, about 50 Chinese armored vehicles and tanks crossed the Duman (Tumen) River from Sanhe into the North Korean city of Hoeryong in North Hamgyong Province.”

Residents were woken up by the roar of armored vehicles. Hoeryong is only about 50 km from Rajin-Sonbong. Other witnesses said they saw military jeeps running from the Chinese city of Dandong in the direction of Sinuiju in the North at around the same time.

“The Chinese armored vehicles could be used to suppress public disturbances and the jeeps to round up on defectors from the North,” the source speculated.

Nam Joo-hong, the ambassador for international security, said, “What China is most worried about in case of a sudden change in the North is mass influx of defectors, which would throw the three northeastern Chinese provinces into confusion. With its military presence in Rajin-Sonbong, there is a likelihood that China could intervene in Korean affairs by sending a large number of troops into the North under the pretext of protecting its residents there in an emergency.”

The North and China have engaged in lively military exchanges since two visits to China by North Korean leader Kim Jong-il last year. Guo Boxiong, the top Chinese military officer and vice chairman of the Chinese Central Military Commission, visited the North in late October last year and met with leader Kim Jong-il and his son and heir Jong-un. In the meeting, Kim senior emphasized “blood ties” between the two countries.

A Chinese mission has been stationed in Rajin-Sonbong since last December. China is transporting natural resources from its northeastern region to the south via Rajin-Sonbong Port, which has recently been renovated.

According to China’s official Xinhua news agency on Jan. 3, China first used the port on Dec. 7, when it transported 20,000 tons of coal from a mine in Hunchun, Jilin Province to southern parts including Shanghai. There is speculation that China will supply its own electricity to Rajin-Sonbong from April.

Quoting an internal North Korean source, the online newspaper Daily NK said the North and China in December signed an investment pact on building three more piers at the port and building a highway and laying a railroad between Quanhe in Jilin and Rajin-Sonbong.

The number of Chinese people arriving in the special zone has grown as a result of the North’s quest for investment, observers said.

“The North Korean State Security has more or less stopped checking Chinese people,” another source said. “The North has apparently concluded that it is unavoidable to accept the Chinese military presence on its land to woo Chinese investment, even if it’s not happy about it.”

Read the full story here:
China to station troops in N. Korea: report
AFP
1/16/2011

According to TheyWorkforYou.com:

January 11, 2011

Lord Moonie (Labour)
To ask Her Majesty’s Government how many North Korean diplomats are stationed in London and how many British diplomats are in North Korea; and what representations they have made to those diplomats in London about concerns over recent cross-border incidents on the Korean peninsula.

Lord Howell of Guildford (Minister of State, Foreign and Commonwealth Office; Conservative)
There are five diplomats from North Korea based in London. The Foreign and Commonwealth Office employs approximately 10 staff in Pyongyang. This includes UK-based civil servants and locally engaged staff. For operational and security reasons, we cannot provide a more detailed breakdown. Senior officials in the UK, and our ambassador to Pyongyang, expressed to the North Korean authorities grave concern about the recent cross-border incidents, and urged restraint.

According to the Korea Times:

The late North Korean leader Kim Il-sung proposed secret negotiations with Washington ahead of the assassination of then South Korean first lady Yuk Young-soo in 1974, according to a classified document dated June 6, 1974 from the U.S. Embassy in Senegal.

The revelation came after An Chi-yong, a former journalist based in the United States, posted the confidential dossier, classified as “secret,” on his website “Secrets of Korea,” Tuesday.

It reveals that the North’s founder, father of current leader Kim Jong-il, asked the late Senegalese President Leopold Senghor to deliver a secret message to the U.S. in 1974.

“President Senghor informed me on June 5 that during his recent visit to Pyongyang, Kim Il-sung charged him with a message for the United States government,” according to the dossier.

“Kim Il-sung said the DPRK (North Korea) would welcome secret negotiations with the USG (U.S. government) on the future of Korea.”

The suggestion was made two months before the assassination of the first lady on Aug. 15, 1974.

Yuk was shot by a Japan-born Korean believed to be a communist sympathizer and having acted upon orders from a pro-Pyongyang organization there.

The dossier also offers a glimpse of Kim Il-sung’s attitude toward Washington and Tokyo and his thoughts on the unification of the two Koreas.

“The North Korean leader told Senghor he felt the DPRK’s enemy in the Pacific is Japan, not us,” the document stated.

“What North Korea seeks is a confederation, not suppression of South Korea, and within that confederation, there would be a place for U.S. influence in the South.”

Another U.S. government document that cites a New York Times article by Richard Halloran reveals that Kim Il-sung may have sought a similar favor from the late Japanese Prime Minister Takeo Miki before the 1974 assassination.

“Halloran (NYT 8/10) says Kim Il-sung informed President Ford through Prime Minister Miki he wants to open direct talks with us to settle outstanding issues of Korea,” according to the dossier dated Aug. 11, 1975. “Wants us to send envoy to prepare agenda for talks with HAK (Henry A. Kissinger) on U.S. troop withdrawal, peace treaty to replace 1953 truce.”

The two Koreas remain technically at war as the 1950-53 Korean War ended in an armistice, not a peace treaty

It remains uncertain whether the communist North succeeded in holding bilateral talks with Washington.

A declassified U.S. document shows that Pyongyang continued its efforts to have dialogue with the U.S. even after the tragic assassination took place.

It says on Aug. 27 1974 an aide to then Romanian President Nicolae Ceausescu met with then U.S. President Ford at the White House to deliver a message from Kim Il-sung.

“The North Korean leadership wants to have confidential contact with the United States for discussions,” according to the declassified memorandum from President Gerald Ford’s files.

Yet, Ford’s response to the repeated proposal for talks was lukewarm.

“Certain things must precede such contacts. We don’t want to go in without a firm understanding,” the U.S. President was quoted as saying in the declassified documents.

Here is a link to the actual document.

Here is a link to “Secret[s] of Korea“.

Read the full story here:
NK proposed talks with US before 1974 assassination’
The Korea Times
Lee Tae-hoon
2011-1-11

According to the Choson Ilbo:

Siem Reap, Cambodia’s second largest city near the sprawling ruins of the Angkor Wat, has two North Korean restaurants, down from three since North Korea recalled all their expat staff after Kim Jong-il’s stroke in 2008 and returned only the employees of two of them. The restaurants rely on South Korean tourists for business since the town is a popular destination for them.

One of them, called Restaurant Pyongyang, sells the famous cold noodles or naengmyeon for US$7 a dish, while North Korean dancers perform and pour drinks for customers. It used to be a regular stopover for South Korean tourists, with tour agencies charging $30 for a visit and a meal. One tour guide said, “In Cambodia $7 a dish is already pretty expensive, but many tourists go to the restaurant because of its attractions.”

After North Korea’s sinking of the Navy corvette Cheonan in March last year, the South Korean Embassy in Cambodia asked tour agencies and South Korean residents’ association there to avoid sending visitors from the South there, but local sources say the plea fell largely on deaf ears. But the North’s artillery attack on Yeonpyong Island in November last year finally did the trick. The South Korean residents’ association in Siem Reap voluntarily boycotted the North Korean restaurants, and tour agencies also voluntarily took them off their itinerary.

The restaurants are apparently suffering. A member of the South Korean residents’ association said, “Almost all of the customers were South Korean tourists, but it seems that even the performances have stopped now there are no customers.”

Around 120,000 South Koreans a year reportedly visited the two restaurants, contributing to an estimated W200-300 million (US$1=W1,126) in monthly sales. North Korea runs over 100 restaurants in China, Vietnam, Thailand, Laos and Russia, which serve as a source of much-needed hard currency for the regime by sending home $100,000-300,000 a year.

The mood in Siem Reap is now desperate. Last month, a placard outside a South Korean restaurant criticizing North Korea’s attacks were torn down by seven people who appeared to be North Korean agents, in what expats there believe was another small-scale North Korean provocation. Tour agencies are also losing revenues after taking the restaurants off their itineraries. “We used to charge $30 per visit and took 30 percent of the profits, but not any more,” a tour guide said.

South Korean residents’ associations abroad rarely voluntarily boycott North Korean restaurants. The Okryugwan chain of North Korean restaurants in Beijing’s Wangjing district is still accessible to South Koreans. A South Korean Embassy official there said, “We asked residents to avoid the restaurant in November but did not force them.”

Meanwhile, a North Korean restaurant in Kathmandu, Nepal closed down in November after its North Korean manager defected to South Korea.

Read the full story below:
N.Korean Restaurants Abroad Feel the Pinch
Choson Ilbo
1/10/2011

According to The Australian:

The use of an Australian-owned cargo ship to smuggle weapons from North Korea to Iran has been highlighted in a report to the UN.

It was one of several breaches of UN sanctions against Kim Jong-il’s regime detailed in a report to the Security Council.

The report, which was submitted to the council recently after months of obstruction from China, found the North was making $US100 million a year through illegal arms sales to Syria, Iran and Burma.

Pyongyang used shadowy webs of front companies, false manifests and complex routes to try to get around sanctions aimed at stopping its arms proliferation, the investigation found.

The report flags the 2009 interception of the ANL Australia in Sharjah as one of at least four occasions that North Korea was caught out exporting arms or defence equipment.

The report said weapons were seized from the ANL Australia in the United Arab Emirates on July 22, 2009.

The cargo is thought to have included up to 10 containers of arms, including rocket-propelled grenades and trigger mechanisms and propellant, although this is not detailed in the report.

The cargo was packed and sealed in North Korea and shipped to China, where it was loaded aboard the ANL Australia en route to Iran.

The Bahamas-flagged vessel was owned by ANL Container Line at the time.

ANL, once Australia’s national shipping line, was taken over by French company CMA CGM.

Despite the breach of sanctions, an Australian government investigation found ANL was not responsible because the ship was chartered by a foreign company at the time.

“The Australian government’s inquiries into this matter indicated that at all relevant times the vessel was not under the operational control of its owner, but was rather being chartered by a non-Australian company,” a Department of Foreign Affairs and Trade spokesman said.

“No conduct relevant to the shipment can be attributed to an Australian person or body corporate,” he said.

ANL declined to comment.

The report found that while no ballistic missile or nuclear-related materials emanating from North Korea had been intercepted since sanctions were applied, evidence suggested “continuing DPRK (North Korea) involvement in nuclear and ballistic missile-related activities in certain countries, including Iran, Syria and Myanmar (Burma)”.

“To supplement its foreign earnings, the DPRK has long been involved in illicit and questionable international transactions (including) the surreptitious transfer of nuclear and ballistic missile-related equipment, know-how and technology,” it says.

The panel received government reports suggesting North Korea had helped build Syria’s Dair Alzour nuclear facility (destroyed in 2007 by an Israeli attack) along with details of Japan’s arrest in June 2009 of three individuals trying to illegally export a magnetometer, a device with potential missile-related uses, to Burma.

The report cited in the story is the “Panel of Experts” report to the UNSC.  You can read (and search) it here (PDF).

Read the full story here:
UN cites ANL in N Korea arms smuggling
The Australian
Rick Wallace
1/10/2011

According to Yonhap:

North Korea’s external trade fell in 2009 with its economic reliance on China staying significantly high, a report showed Sunday, underscoring the need for Pyongyang to diversify its industry structure and open its market for survival.

According to the report by the Korea Finance Corporation, North Korea’s total trade amounted to US$3.41 billion in the cited year, down 10.6 percent from a year earlier. The trade decrease was the largest since 1998.

Exports dropped 6 percent to $1.06 billion, while imports fell 12.5 percent to $2.35 billion over the same period, the report showed, bringing the North’s trade deficit to $1.29 billion.

With international sanctions in place for its nuclear ambitions and its reluctance to open up its economy, the North’s dependence on China stayed quite high at 80.4 percent in 2009, the report showed. Its trade deficit with Beijing totaled $1.1 billion.

The report said that the North should open its market and diversify its industry structure currently focused on producing weapons, while improving overall infrastructure such as power generation facilities, should it seek to revive its economy.

It also emphasized the need for resumption of inter-Korean trade and an increase in international aid for the North’s survival.

“For the North Korean economy to get back on track, inter-Korean trade has to be resumed and aid from the international community should also be expanded,” said an official of the state-run corporation.

South Korea’s economic relations with the North have remained frozen since Seoul cut almost all inter-Korean trade in May 2010 after it found Pyongyang was behind the deadly attack of its naval ship in March that killed 46 sailors.

The move led to a drop of around 30 percent in inter-Korean trade last year, according to the latest report by Seoul’s customs office. South Korea is one of the North’s major trade partners, although the two remain technically at war as their 1950-53 conflict ended in a truce, not a peace treaty.

If a reader can send me a link to the actual report, I would appreciate it.

The Los Angeles Times also covered the report.

Read the full story here:
N. Korea’s trade falls, reliance on China remains high in 2009
Yonhap
1/9/2011

UPDATE  1 (2011-1-19): According to the Wall Street Journal:

A Chinese firm has signed a letter of intent to invest $2 billion in a North Korean industrial zone, representing one of the largest potential investments in Kim Jong Il’s authoritarian state and a challenge to U.S. policy in the region.

The agreement was signed with little fanfare in Pyongyang on Dec. 20—a day otherwise marked by pitched tension on the Korean peninsula following the North’s shelling of a South Korean island—according to documents viewed by the Wall Street Journal. Confirmation of the deal comes as Chinese President Hu Jintao visits Washington this week in a bid to forge closer security and economic ties with the U.S.

U.S. officials said the administration is aware of the possible Chinese investment, but noted that previous projects haven’t gone anywhere. “No investment project will enable North Korea to meet the needs of its people as long as its government continues its destabilizing behavior,” said a senior administration official.

The letter of intent involves China’s Shangdi Guanqun Investment Co. and North Korea’s Investment and Development Group. An assistant to the managing director of Shangdi Guanqun, who identified himself only by his surname, Han, said his company’s planned investment is focused on the Rason special economic zone, situated near North Korea’s border with Russia.

The zone was called Rajin-Sonbong when it was established in 1991, but failed to attract sufficient investment. It was revived, and re-named Rason, following a visit there in 2009 by Mr. Kim.

Mr. Han said the plan is to develop infrastructure, including docks, a power plant and roads over the next two to three years, followed by various industrial projects, including an oil refinery, over the next five to 10 years. He said the company was waiting for a response from the North Korean government before applying for approval from China’s Ministry of Commerce.

“It’s all pending at this stage, and it’s really up to the Korean side to make the decision,” Mr. Han said. He added that the $2 billion figure was what the North Korean side had hoped for, not necessarily what his company could deliver.

The company’s Web site says the company was “under the administration” of a state-owned enterprise, Shangdi Purchase-Estate Corporation. Mr. Han, however, said his company was “100 percent private.”

For the Obama administration, securing China’s cooperation in restraining North Korea’s military and nuclear-proliferation activities is a cornerstone of a warmer bilateral relationship. But the potential investment is a reminder of possible limits of Chinese cooperation.

The U.S. wants to step up sanctions to force Kim Jong Il to give up his nuclear-weapons arsenal and military activities. China, meanwhile, is increasingly promoting business projects and direct investment to influence the North, say Chinese and American analysts, arguing financial pressure hasn’t worked.

China is North Korea’s biggest trading partner and aid donor, but the scale of this deal raises concerns in Seoul that Beijing is running its own version of the “Sunshine” policy under which the South boosted investment in the North from 1998 to 2008.

This policy disconnect is expected to be one of the issues Chinese and U.S. officials discuss this week. “These types of deals pursued by China generally present a real challenge to the sanctions” being effective, said Victor Cha, a North Korea expert who helped oversee Asia policy in George W. Bush’s National Security Council. “The net effect is that it does make it more difficult for these sanctions to have the desired effect.”

Such deals have emerged in the past and have come to nothing, analysts said, and it is possible this one, too, could peter out. A number of similar North Korean economic zones have failed to live up to their billing because of poor infrastructure and corruption, and a lack of economic reform. News of the deal was first reported in the Korean-language press, including the Voice of America’s Korean service.

It is unclear how long the agreement has been in the works. But its Dec. 20 signing came on the day South Korea conducted a closely watched artillery test from Yeonpyeong Island near North Korea.

The test marked a high point in tensions after North Korea’s surprise late November shelling of Yeonpyeong, which killed four South Koreans. Pyongyang had threatened a swift military response should Seoul carry out an announced artillery test on Dec. 20. But the day’s drill came and went amid high security in the South, with the North saying in a statement it “did not feel any need to retaliate.”

Top administration officials have recently both praised and chided the Chinese over the North. On a trip to China last week, Defense Secretary Robert Gates commended the Chinese for their “constructive” role in reducing tensions on the peninsula after Pyongyang’s recent shelling of a South Korean island. Secretary of State Hillary Clinton in a Friday speech pressed China to be more aggressive in helping tamp down the North’s nuclear program.

The proposed investment is among the strongest evidence yet of China’s strategy of using direct investment rather political pressure to push for change in North Korea. Chinese experts say that after North Korea’s first nuclear test in 2006, China tried to make improved bilateral relations dependent on Pyongyang dismantling its nuclear program. But after a second test in 2009, China changed tack.

Beijing now believes, according to Chinese experts, that the North Korean regime won’t respond to political pressure and could collapse completely if China cuts off aid and investment, triggering a flood of refugees into northeastern China, and bringing U.S. troops right up to the Chinese border.

The investment strategy was cemented when China’s Premier Wen Jiabao visited North Korea in October 2009 and signed a slew of economic and trade agreements. One of those agreements was for China to fund construction of a $250 million bridge across the Yalu River that separates the two countries.

Construction of the bridge, which would link China with another North Korean special economic zone, had been slated to start in August. Local officials said in November it appeared to have been put on hold indefinitely. Now they say a ground-breaking ceremony was held Dec. 31.

U.S. officials are particularly concerned about how China’s financial links to North Korea may be facilitating Pyongyang’s weapons programs. In November, Pyongyang showed a visiting American scientist 2,000 centrifuges stationed at a cover site, drastically raising fears about the North’s ability to expand its nuclear-weapons arsenal.

“China’s increased economic support undercuts the rest of the region’s efforts to convince Pyongyang that there will be consequences for further belligerence, nuclear weapons development or transfer of nuclear capabilities,” said Michael Green, who also served as a senior official on Asia during the Bush administration.

Read the full story here:
Chinese Firm to Invest in North Korea
Wall Street Journal
Jay Soloman and Jeremy Page
2011-1-19

ORIGINAL POST (2011-1-7): According to the Joong Ang Ilbo:

A Chinese state-run company recently agreed to invest $2 billion in North Korea’s Rason free trade zone, the JoongAng Ilbo learned yesterday from documents related to the deal.

Shangdi Guanqun Investment Co., Ltd. signed a 10-point memorandum of understanding with Pyongyang’s Investment and Development Group on Dec. 20 in Beijing, the documents showed.

The signing ceremony was attended by Mi Chang, president of Shangdi Guanqun Investment, and Kim Chol-jin, president of the Investment and Development Group.

The goal of the investment, stated in the documents, is to build Rason, a northeastern North Korean city on the East Sea that borders both China and Russia, into the “biggest industrial zone in Northeast Asia” in around 10 years.

The project calls for coal-fired power plants, roads, piers and oil refineries in the North Hamgyong Province city, the documents said.

According to the documents, the deal is “a strategic joint project based on trust between high-level figures” in China and North Korea, which suggests it may have been negotiated by North Korean leader Kim Jong-il during two visits to China last year, on which he met Chinese President Hu Jintao.

The North’s economy has suffered under international sanctions on trade and financial services overseas, imposed after its nuclear weapon tests, and is desperately seeking foreign investment.

China is investing in Rason as an export base to serve markets in Japan, southern China and Southeast Asia.

Rason is a merger of two towns, Rajin and Sonbong, and was designated the first free trade zone in the North in 1991. It was promoted to a “special city,” which means it has fewer restrictions on businesses.

“We have a deep interest in North Korea’s ample natural resources,” an official of Shangdi Guanqun Investment Co., Ltd. told the JoongAng Ilbo. “To facilitate the export of natural resources [from the region], we will invest $300 million first and construct a coal-fire power plant at the coal mine and build a railway, roads, and harbors and piers [near it].”

The Chinese firm’s official said the company opened an office in Pyongyang at the end of last month.

Shangdi Guanqun Investment, established in 1995 by the Chinese government, is a trading firm specializing in oil processing, natural resources and international financial services. It is one of the key companies in China’s 12th five-year economic development plan that starts this year.

North Korea’s Investment and Development Group is in charge of developing the country’s four free trade zones. The other economic special zones are in Kaesong, Mount Kumgang and Sinuiju.

The Shangdi Guanqun Investment official said the company will build an oil refinery in Rason, where it plans to refine crude imported from the Middle East and Russia and sell the output to China or other countries.

I believe this Chinese story also relates to the same project.

Read the full story here:
China backs North’s Rason project
Joong Ang Daily
Ko Soo-suk
2011-1-7

According to Yonhap:

Despite persisting political woes, a new South Korean company has begun operating in North Korea’s border industrial complex that combines superior South Korean capital and know-how with the North’s cheap local labor, a government official said Thursday.

The company, known as DSE, completed building its factory in Kaesong in early May and is therefore exempt from the investment ban on North Korea that Seoul imposed later that month over the sinking of a South Korean warship, the Unification Ministry official said.

…

The ministry official, who spoke on customary condition of anonymity, said DSE began operating on Jan. 3 and is employing 160 North Korean workers, part of the 44,000 workforce in the Kaesong complex, to produce lighting apparatuses and other metallic products.

The number of South Korean companies operating in Kaesong now stands at 122, the official added.

…

South Korea has since sharply cut down on the number of its workers allowed to stay in Kaesong. The North, in an apparent act of desperation to revive its economy, has since called for lowering tension and holding cross-border dialogue. South Korean officials are demanding that the North first show “sincerity,” indicating Pyongyang must apologize for the series of provocations blamed on it.

Read the full story here:
New S. Korean company begins operating in N. Korean factory park
Yonhap
Sam Kim
1/6/2011