North Korean Economy Watch

From Joong Ang Daily:

Recently North Korea and China decided to cancel reciprocal visa waivers for trips of less than six months between the two countries, something that had been in effect for 57 years, since full diplomatic relations were established in October 1949. North Korea also ordered people who hold a Chinese passport and could travel to North Korea freely to obtain a visa, too.
It is noteworthy that North Korea moved first and China followed.
The visa waiver had been possible because of the special relationship between the Chinese Communist Party and the North Korean Workers’ Party.
Therefore, we wonder if it means there will be a change in the special relationship between the two parties.
Also, it is strange that the self-proclaimed socialist brothers, China and North Korea, have decided to demand visas from each other’s citizens. This implies that the back side of the two countries’ relations is complicated.
First of all, there is a big disparity in economic relations between the two countries.
North Korea’s reliance on China has increased. Last year, 40 percent of North Korea’s total trade volume was with China. And the North’s trade deficit with China has grown to $500 million.

As a result of economic sanctions imposed by the United States and Japan, the North’s economic dependency on Chinese capital has gotten heavier.

In 2004, the number of Chinese businessmen who visited Pyongyang for investment and trade was more than 3,000. It is estimated that the number would be more than 10,000 if Chinese tourists and peddlers who carry bundles of merchandise through the border between China and North Korea were included.

Since the scope of economic cooperation has expanded to investment in social overhead capital from simple toil processing, such as the development of port facilities in Najin and Musan iron ore mines, it is said that virtually all places in North Korea are visited by Chinese businessmen.

There is even a rumor that a Chinatown will be built in Heungnam, where there was one during the Japanese occupation period.

At the tourist resorts and stores in Pyongyang, Chinese is spoken without hesitation and the Chinese yuan is freely used.

Last week, I visited Dandong, China and counted 30 vehicles passing the North Korea-China Friendship Bridge over a one-hour period.

From 7 a.m. ’til 7 p.m., large trucks carrying Chinese goods entered North Korea continuously.

There was news that the construction of a new bridge connecting Dandong with the southern part of Sinuiju would begin soon. I couldn’t help but worry that North Korea would become the fourth northern province of China.

The rush of Chinese capital into North Korea started in 2003. Perhaps the North Korean authorities felt it necessary to control that.

Although the two countries are bound by a strong socialist alliance, the North’s economic subordination to China is not desirable for the development of North Korea’s so-called Juche, or self-sufficient, economy. Therefore, it seems that the North has taken a self-protection measure by restraining the free travel of personnel.

North Korea’s rejection of both Chinese-style reform and the open-door policy was one of the reasons behind the decision to cancel the visa waiver.

Experts say that some good things could come out of expanded economic cooperation between North Korea and China, as both economies would grow together.

As close economic exchanges between the two provide an opportunity for the North to expand its contacts with the outside world, there are people who hope that economic exchanges might help North Korea accommodate a Chinese style open-door policy.

However, the North Korean leadership is determined not to accommodate the Chinese style policy because its territory is too narrow.

Especially, North Korea worries that if contact with China is expanded, it will be unavoidable for the North to follow Chinese-style reform, which could threaten its political system.

The wave of capitalist influence, such as videotapes smuggled into the North, is a headache for the government as it tries to maintain its political system.

In other words, the North is in the grip of uneasiness that its system can be shaken if it enjoys the fruit of expanded economic cooperation with China.

The North seems to have decided that it must apply the same rule to China as it has to Western countries.

Accordingly, the methods of economic cooperation between the two will change.

It is likely that the North will seek a new pattern of economic cooperation with China that can minimize the flow of people into North Korea but bring practical profits through a couple of large-scale economic transactions. While keeping the Chinese people from striding into North Korea, the North may promote cooperation between major trading centers.

* The writer is a professor of North Korean studies at Korea University. Translation by the JoongAng Daily staff.

Fromthe Daily NK:

Lee Jeong Gil (44), a Chinese-North Korean trader who recently returned from Shinuiju in late April, said that, “It would be hard for Shinuiju to be a special region. However, it is likely that an international market would be formed in the outskirts of Shinuiju.”

Mr. Lee stated, “As far as I know, besides that of Shinuiju, international market plans would be carried out in the outskirts of Nampo and Wonsan as well.” He went on to explain, “This was already determined at the Central Committee level,” something he noted hearing directly from a high-ranking official living in Shinuiju.

Mr. Lee explained, “Because of the huge removal of residents and the great impact on outside areas caused by the special region plan, the government regards the Shinuiju special region plan as complicated.” He noted as well, that, “It seems that the government pursues this in the same manner as the previously constructed Onsung and Nasun international markets.”

The special region plan is to develop a particular region by dividing it into a concerned area and an outskirt. The goal would then be to introduce into the concerned area such aspects of a market economy as financial industries, manufacturing industries, accommodation industries, and free trade zones. Like special regions, international markets could attract foreign investments. Yet, because special regions are controlled by international markets that are not yet mature - most only at a stage where foreigners rent stores to do business - the effects that international markets can bring are meager.

Mr. Lee said, “It seems reasonable to assume that the government will permit commuting since it has allowed daily visa-free commutes to and from China since July… So, it requires a look into the news that North Korean customs moved from Ryeokjeon-dong, the present area, to Minpo-dong where the second NK-China Yalu River iron bridge plan is being constructed.”

He went on to explain, “I heard that the government will construct new buildings for foreign traders to do business in, in the outskirts of Shinuiju, and that they will give leasing rights to investors who invest more than 100,000 dollars.”

On the other hand, on the 23rd, Mr. Kim (51) noted, “The internal policy direction for Shinuiju and Nampo was already set to make special regions within the year to overcome the economic crisis [North Korea] has faced recently.” It is likely that what the high-ranking official testified about is not about special regions, but about international markets.

According to the Nautilus Institute’s web site:

“Under the direction of central authorities, foreign currency management groups are rapidly being moved into Sinuiju, while ordinary residents are being relocated to other regions only to be replaced by residents of Pyongyang and other areas who are in the process of moving in.”

The Sinuiju Special Administrative Region (SAR) project lost momentum in September 2002 when its first governor-to-be, Chinese-born Dutch businessman Yang Bin, was arrested in China. North Korean leader Kim Jong Il’s visit to China at the beginning of this year, however, appears to have triggered a turnaround. With Kim’s China trip focused on the revision of economic policies, the rejuvenation of Sinuiju SAR development plans came into the spotlight.

Most South Korean press have run pieces, based on the stories of North Korean defectors and Chinese residents in Dandoong and other border areas, alluding to the fact that there is change in the air around Sinuiju. A North Korean businessman in Dandoong was quoted as saying, “No official word has come down from central [authorities], but they are busy preparing the Sinuiju SAR,” while rumors are spreading among area residents that “Sinuiju is the next Hong Kong.”

The most reluctant promoters are the People’s Committee and regional administrative organs. As orders come down, some administrators are required to immediately pack and relocate to southern Sinuiju, an underdeveloped area not even comparable to Sinuiju proper. Authorities had chosen the site as far back as 1986, and while development was fully promoted, only factories were built up. Housing, roads, and other indirect social capital facilities are still lacking. While regional authorities may have decided to build up southern Sinuiju, it will take another ten years of hard work to do so.

On the other hand, the outlook for city authorities is considerably brighter. This is because in the future, they will have the opportunity to rise up though organizations run by special administrative businesses. Up until now, instructions have come through the Regional People’s Committee, security bureau and defense authorities, but even though they own the facilities, they can still receive orders directly from the central government. Because of this, regional officials are still influenced by the temperament of local and central party politics while being faced with increasing pressure from city authorities to transfer power to them. While some factories — like the Sinuiju Cosmetics Factory, Sinuiju Shoe Factory, Sinuiju Synthetic Fiber Plant, and other large factories — are preparing for foreign capital support and cooperative ventures, most administrators appear to be pushing for keeping the status quo.

There are still many concerns. As the SAR is being set up, central officials are being dispatched to fill roles as factory officials; central officials without any personal interest. A similar sort of dispatch of central officials took place in the Rajin-Sonbong Special Economic Zone in the past.

Most small- and medium-sized enterprises and regional factories are beginning to transform into trading companies. There are currently around one hundred fifty such trading offices in Sinuiju. In the future, if Sinuiju is officially designated as a SAR, it appears that a great many more trade offices will appear.

Other news from Sinuiju insiders is that the People’s Committee, People’s Security Force, National Security and Defense Bureau and other central government departments that have received Kim Jong Il’s permission to trade have already opened offices in Sinuiju, employing people in the area and busily seeking out people with connections in China in order to find trading partners.

It appears by looking at the relocation currently underway that the goal is to move residents within the same timeframe that was required for the first round of relocations in 2002, when residents were moved to Chunma, Kwaksan, Dongrim and other areas around the outskirts of Sinuiju. There are problems here as well, as the government wants to relocate residents from Pyongyang and other regions to Sinuiju. At issue is the fact that while the number of residents who can move in needs to equal the number relocated out of the area, some North Koreans have already used connections with the central and regional party affiliates in order to move to the region.

In addition, the housing market is active, with housing prices in central downtown areas having already skyrocketed. While officially owned by the state, dwellings are unofficially “sold” through the use of “modification fees”: apartments run from 25 to 30 million won (8 to 10 thousand USD), while two-three story condominiums in “Chinatown” in the Namsang district run in the tens of thousands of dollars.

However, complications have arisen. Many residents being moved out have decided to get rid of their houses, but this has proved more difficult than expected. Some have put up their house for sale but have been unable to find a buyer. There are also those who were caught in the midst of sales through “real estate offices” when a crackdown by authorities resulted in their expulsion. A source stated that the administrative authority of the city security bureau in charge of relocating residents is undermanned and takes different measures to direct different groups of residents, while pressing for the expulsion of what it deems as “lesser” or unemployed people.

According to the Daily NK:

According to a few unidentified sources, on April 19 the the North Korean government started cracking down on laekages from Shinuiju and the Yalu River.

In the areas along the Chinese border, the story claims, the government is not as strong.  Drug shipments come in.  Sensitive internal news goes out.  Cell phones that operate from Chinese towers are target number one.

Economic Reform and SEZ as Survival Strategy of DPRK
PDF: Deok Ryong Yoon.pdf
Deok Ryong Yoon

Introduction to & implications of Gaesong Industrial Complex Project
PDF: kaesong.faqs.pdf
Ministry of Unification

Gaeseong Industrial complex: Past, Present and Future
PDF: Dong-geun Kim.pdf
Speech by Dong-geun Kim, Chairman of Gaeseong Industrial District Management Committee

Gaeseong Industrial Complex : Frequently Asked Questions (FAQs)
PDF: kaesong.faqs1.pdf
Ministry of Unification, ROK

(Hat Tip: Tim Beal)

From the Daily NK:

Computer Prices (Mar 14, 2006):
-17inch Pentium Ⅲ is US$110~120 retail ($90 wholesale price)
-A printer is US$65~70
-10 Floppy discs are 5,000W
-A keyboard is US$20
-A mouse is US$5

Snack prices (March 28, 2006)
-roast chicken is 6,500-8,000W
-roast duck is 9,000~12,000W
-750g of noodles are 2,400W
-box of Korean noodles is 6,750W
-1kg of potatoes is 400W
-1kg of Beans is 700W
-1kg of wheat flour is 750W (690W at wholesale price)
-400g of Milk is 5,000W
-1kg of Butter powder is 5,000W
-25g of Baking powder is 400W
-1kg of Chinese noodles of 2,000W
-1kg of dried cuttlefish is 8,800W.

Entertainment Costs (March 28, 2006)
-movie admission fee is 50W
-comic book is 1,500W, to borrow 100W
-Swimming pool is 70W
-bath admission fee is 2,500W
-5,000W ($1.67) /huor to use a Karaoke singing room
-1,000W ($0.33) /hour to use a computer in an internet café

Other Prices
-sanitary napkin is 500W, 600w, and 1,000w
-Skin lotions of three kinds are 42,000w
-Aloe cosmetics of three kinds are 42,000w
-A set of cosmetics (a skin cream and a skin lotion) is 10,000w (made in South Korea), 3,500w (made in China)
-Small gas cooking stove is 27,000w (made in South Korea / 25,000w in a wholesale price
-An electric bicycle is 150-200w.

North Korean inflation has increased following consecutively excessive issues of the 500W, 1,000W, and 5,000W notes.

Cities that can provide North Koreans with leisure facilities to enjoy are only Pyongyang, Shinuiju, Chongin, Hamhung, and Rasun. These cities possess big theaters, amusement parks, and swimming pools. Especially Shinuiju, which is close to China, has been introduced with foreign cultures and commodities very quickly. Shinuiju residents are also in the highest economic class of the North Koreans. Thus, Shinuiju has internet cafes, singing rooms, saunas, massage rooms, and comic bookstores.

The investigation was carried out by traders visiting Shinuiju in March and attaining the price levels concerned and then DailyNK gathered the information and cross-examined it.

Also, another trader emphasized that, “The official wage of North Korean workers is about 3,000 won. At the same time, the price for using a singing room per hour is 5,000 won. It shows how badly North Korea has been transformed,” adding that, “Shinuiju is the city where traders doing business with big money from North Korea and China gather. Such singing rooms, PC rooms, and saunas are just for them.”

Items marked by dollars in the price index below are usually paid in dollars, not North Korean won. A Chinese businessman who participated in the price investigation informed us that, “Currently in North Korea, the dollar is used frequently enough to be called ‘common currency’ and has more exchange value,” adding, “As trading costly articles, their paying in dollars makes them win credits.” He also said that, “That the dollar is exchanged into North Korea won is welcomed, yet to exchange the won into dollars is often impossible, even double the value.”

Now, in the early of April, the exchange rate of the dollar in North Korean black markets is roughly 3,000 won against the dollar.

From the Daily NK:

It seems that Kim Jong Il’s visit to China has, once agian, inspired him to once again, take a crack at turning Sinuiju into a “Special Administrative Region” of some sort.  no doubt, this time, Beijing is on board with his plan, unlike last time.

From the report:

• They are planning to move the Shinuiju residents of about 7,000 families (25,000 to 30,000 people) to close cities and rural areas. Their plan is to strictly sort out those from “bad families” and those who have committed political errors (wrongdoings) and move them to Chulsan-gun, Donglim-gun, Yomju-gun, and Taechun-gun of North Pyongan province.  There have been rumors about moving those people with unclear backgrounds out of the region every time they talked about making the Special Administrative Region.
• Starting February 1, revised laws regarding use of cellular phones apply. Before, cellular phones were managed by the National Security Agency, but now under the new law, they are managed by security offices (police offices).   The sources report that the security offices have posted phone detectors here and there to detect cellular phones. In January, a number of Chinese-descendent Koreans were caught using cellular phones in Ryongchon and were fined 500 USD each.

The Index of Economic Freedom is published by the Heritage Foundation and the Wall Street Journal.   The index tracks the march of economic freedom around the world, becoming a must-have resource for investors, policymakers, academics, and others who want to learn about the link between economic freedom and prosperity. The 2006 Index of Economic Freedom measures 161 countries against a list of 50 independent variables divided into 10 broad factors of economic freedom. Low scores are more desirable; the higher the score on a factor, the greater the level of government interference in the economy, and the less economic freedom a country enjoys.

Accoding to the 2006 Index:

The Democratic People’s Republic of Korea is undergoing some economic changes. In 2002, the government initiated tentative steps toward markets and entrepreneurship by creating semi-private markets, shops, and small business across the country. Part of these reforms included the phasing out of a decades-old food rationing and public distribution system and allowing prices and exchange rates to float. Nevertheless, the country remains firmly rooted in its communist and authoritarian system with its central command economy, and deeper institutional reform is constrained by the degeneration of North Korea’s industrial, transportation, and energy infrastructure, which continues to be neglected for the sake of the government’s military policy. Although reports indicate that there is greater economic activity in Pyongyang and other cities, economic deprivation seems to be worsening for most of the population. The country remains heavily dependent on external assistance for its food supplies, and there are indications that the economy is opening up to more trade with its two neighbors, China and South Korea. North Korea’s trade volume in 2004 is estimated to have reached its highest level since 1991—$2.85 billion. However, the possibility that North Korea might open wide-scale trade remains low because of lingering tensions about its nuclear weapons program. The Democratic People’s Republic of Korea’s overall score is unchanged this year.

North Korean trade data are compiled from trading partners’ statistics and published by the South’s Korea Trade-Investment Promotion Agency…. [M]uch trade is de facto aid, mainly with North Korea’s two main partners, China and South Korea.” According to the Korea Trade-Investment Promotion Agency, North Korea imported slightly over $2 billion in goods in 2003 while exporting slightly more than $1 billion.

“North Korea has the dubious distinction of being first in and last out of the developing world’s debt crisis, initially defaulting in the 1970s and remaining mired in debt today,” reports the Economist Intelligence Unit. “This dire debt record has not stopped North Korea from seeking new foreign investment. Its first special economic zone, at Rajin-Sonbong in the north-east, was gazetted in 1991. A raft of detailed foreign business laws in the 1990s suggested serious intent, but found few takers. Rajin-Sonbong is remote and still lacks basic infrastructure. Wage rates were unrealistically high, as the state controls labour supply and insists on taking its share. More recent special zones, at Mt Kumgang and Kaesong, are more enticing…. Continued nuclear defiance will inevitably deter investors from what remains largely a leap into the unknown.” Aside from these few economic zones where investment is approved on a case-by-case basis, foreign investment is prohibited.

“North Korea largely lacked a financial sector in the capitalist sense. Most funding for industry came from the state, which also earned revenue by taking a percentage on transactions among enterprises…. At least two foreign aid agencies have recently set up microcredit schemes…. Reports in early 2005 suggested that a radical overhaul of the financial system is under way. As a next step in market reforms, investment funds will no longer be allocated by the state under a plan. Instead, as normal elsewhere, firms will have to borrow from banks, whose role and importance are therefore set to grow and change markedly.” Because of debts dating back to the 1970s, most foreign banks will not consider entering North Korea. The central bank also serves as a commercial bank with a network of 227 local branches. A South Korean bank has opened a branch in the Kaesong zone, and a Hong Kong hotel and casino in Rajin-Sonbong includes a bank. The state holds a monopoly on insurance through the State Insurance Bureau and the Korea Foreign Insurance Company. The state continues to dominate the financial sector.

The government controls and determines all wages and prices. According to the Economist Intelligence Unit, “Only in 2002 did real change begin. In July wages and (more so) prices were raised drastically for producers and consumers typically tenfold or more. Enterprises were told to charge prices that reflected their costs, and no longer expect subsidies.” In addition, “the government had adopted a law that acknowledged the existence of farmers’ markets for the first time [in 2003]. However, with no matching supply-side measures to boost output, the result of these tentative reforms has been rampant inflation for many staple goods.” According to the U.S. Department of State, “Government ministries set wages.”

North Korea’s informal market is immense even though the government imprisons many who engage in such activity. Informal market activity in agricultural goods flourishes as a result of famines and oppressive government policies. There is also an active informal market in currency and in trade with China.

Major exports: minerals, metallurgical products, machinery, textiles, fishery products

Major export trading partners: China 37.1%, South Korea 27.1%, Japan 16.3%

Major import trading partners: China 30.6%, South Korea 21.2%, Thailand 9.9%

Asia Times
Michael Rank
11/18/2005

Chinese companies are venturing into North Korea, and both countries hope to reap the rewards. North Korea’s heavy industry is in a desperate state, but Pyongyang is hoping that Chinese investment will come to its rescue, while China sees the North as a convenient source of minerals, from coal to gold.

China’s increasing investment also means that North Korea is casting off its rigid juche, or self-sufficiency, policy and overcoming its deep historical suspicion of its giant northern neighbor.

Border trade in consumer items from televisions to beer has been booming since the 1990s, but now the focus is turning to the industrial sector. Deals are being reached on mines, railways and leasing a North Korean port to a Chinese company, but North Korea is notoriously secretive and few details have been published outside China. The deals include an agreement to “completely open” North Korea’s railways to a Hong Kong millionaire, as well as moves to revive ailing coal, iron and gold mines.

Tumen-Chongjin rail link rumored
Hong Kong businessman Qian Haomin is reported to have reached a US$3 billion deal with North Korea that also involves the Chinese Railways Ministry building a new rail link between the Chinese border city of Tumen and the North Korean port of Chongjin. The agreement marks an end to long-running tension between the Chinese and North Korean state railway authorities over North Korea’s retention of up to 2,000 Chinese goods wagons and reluctance to repay loans.

The Hong Kong news magazine Yazhou Zhoukan recently reported that these issues had been resolved and that Qian’s grandly named company Hong Kong International has agreed to provide the North Koreans with 500 to 1,000 freight wagons. Qian told the magazine that “after six months of effort, there are now hopes of solving the railway transport bottleneck between China and North Korea”, and this would help to integrate the economy of the entire northeast Asian region.

Qian’s ambitions are not limited to railways. Not only has he expressed interest in investing in a North Korean coal mine, but Yazhou Zhoukan also reported that he hopes to set up a special economic zone in the North Korean border city of Sinuiju. He has clearly not been deterred by the unhappy case of Yang Bin, a Dutch-Chinese multi-millionaire who was made head of a similar development zone in 2002. Before Yang could take up his post, he was arrested by the Chinese authorities for tax evasion and other economic crimes and jailed for 18 years.

Qian, aged 41, is originally from the southern Chinese province of Guangdong and moved to Hong Kong in 1993. He has been involved in North Korea since the early 1990s, and has apparently established a fruitful relationship with Prime Minister Pak Pong-ju. He has said that “to invest in North Korea has been my dream” because three of his uncles fought in the Korean war; one was killed and one was seriously wounded. The Hong Kong investor has signed a plastics, tire and battery recycling agreement with North Korea and has expressed interest in investing in the country’s largest anthracite coal mine, which now produces only 1 million tons a year, compared with 3 million tons at its peak.

Tonghua Steel looks North
Meanwhile, state-owned Tonghua Steel or Tonggang, based in the northeastern city of Tonghua, expects to sign a 7 billion yuan ($865 million), 50-year exploration rights deal with the Musan iron ore mine, said to be North Korea’s largest iron deposit. Tonggang, Jilin province’s largest steelmaker, hopes to receive 10 million tons of iron ore a year from Musan as part of its plans to increase steel production from a projected 5.5 million tons in 2007 to 10 million tons in 2010.

The planned deal reflects China’s immense and growing appetite for steel. Although the country already produces 30% of global output, it is heavily reliant on imports and is concerned about rising prices. A Jilin provincial trade official said importing iron ore from North Korea was attractive because of low transport costs, which would increase Tonghua’s competitiveness.

Tonggang officials say they expect the deal to be signed soon, and that of the 7 billion yuan (US$866.1 million) pledged, 2 billion yuan will be invested in transport and power lines. Company president An Fengcheng said agreement had already been reached with China Development Bank on 800 million yuan worth of soft loans and 1.6 billion yuan of hard loans, while “the remaining investment will come in in stages”.

Rajin deal to give China Sea of Japan access
China’s export boom is one of the great economic success stories of the past 25 years, but it is constrained by a lack of suitable ports. In particular, the country lacks a port on the Sea of Japan, but after attempted deals with Russia came to nought, the inland Chinese border city of Hunchun has reached an agreement for a 50-year lease with the nearby North Korean port of Rajin.

The ceding of Rajin, an ice-free port with a handling capacity of 3 million tons a year, will give access to the sea to inland areas of northeast China which, at present, must send freight long distances by rail to the port of Dalian on the Bohai gulf. The agreement also provides for the construction of a 5-10 square kilometer industrial zone and a 67 kilometer highway, and envisages that the Rajin area will become a processing zone for Chinese goods which will then be re-exported to southeast China.

A Hunchun economic official stressed that the leasing of the port is “a business deal and not a government deal”. The South China Morning Post reported from Hunchun that the man behind the deal is Fan Yingsheng, a property developer from Hunan province who put up half the initial capital investment of 60 million euros (US$70 million). The sum could not be denominated in dollars for political reasons.

The paper quoted the United Nations Development Program as saying this sum would only be enough to build the road to Rajin, and far more would be needed to rejuvenate the port. The deadline for final agreement is December 30, 2006, and it remains to be seen if a final deal will be reached in time.

An unusually frank North Korean trade official noted the possible pitfalls as well as the advantages of such deals. Kim Myong-chol, head of the Korean Council for the Promotion of Foreign Trade, said the deals would have to involve importing “highly advanced technology and equipment”, and added: “These agreements are not easy to put into actual practice and can run into many problems so far as funding and bilateral cooperation are concerned.”

“Because the amount of money involved in these cooperative projects is quite large and [North] Korea will be investing ports, roads, etc, there are rather great risks in such investment, and in addition because the domestic Korean economy and its policies, laws and regulations, etc, are unclear, many problems are likely to arise in carrying out these plans,” Kim told a Chinese website.

Coal and gold
Such concerns may have been in the mind of the president of China Minmetals Corp, Zhou Zhongshu, when he signed “an agreement on setting up a joint venture in the coal sector of the DPRK” [North Korea]. The deal was signed in October when Chinese deputy premier Wu Yi visited Pyongyang, and is said to be the first of its kind. North Korean Vice Minister for Foreign Trade Ri Ryong-nam urged the Chinese side to “provide advanced technology and set up a good model for other joint ventures and cooperation between the two countries”.

North Korea also has substantial gold deposits, and a Chinese company plans to invest in a “semi-paralyzed” North Korean gold mine and refine the metal at its base in Zhaoyuan in Shandong province. Guoda Gold Co Ltd reached a preliminary agreement last year with Sangnongsan gold mine, which is said to have gold deposits totaling at least 150 tons.

Guoda deputy manager Lin Deming said his company was attracted to North Korea because of low labor, energy and transport costs as well as the “highly favorable” investment terms offered, but gave no details. Chinese investment in North Korea is certainly increasing, but final agreement on a number of deals has not yet been reached, and political factors such as uncertainty over Pyongyang’s nuclear weapons program may well discourage Chinese companies from moving too fast.

From the Asia Times:
By Michael Rank
11/18/2005

Chinese companies are venturing into North Korea, and both countries hope to reap the rewards. North Korea’s heavy industry is in a desperate state, but Pyongyang is hoping that Chinese investment will come to its rescue, while China sees the North as a convenient source of minerals, from coal to gold.

China’s increasing investment also means that North Korea is casting off its rigid juche, or self-sufficiency, policy and overcoming its deep historical suspicion of its giant northern neighbor.

Border trade in consumer items from televisions to beer has been booming since the 1990s, but now the focus is turning to the industrial sector. Deals are being reached on mines, railways and leasing a North Korean port to a Chinese company, but North Korea is notoriously secretive and few details have been published outside China. The deals include an agreement to “completely open” North Korea’s railways to a Hong Kong millionaire, as well as moves to revive ailing coal, iron and gold mines.

Tumen-Chongjin rail link rumored
Hong Kong businessman Qian Haomin is reported to have reached a US$3 billion deal with North Korea that also involves the Chinese Railways Ministry building a new rail link between the Chinese border city of Tumen and the North Korean port of Chongjin. The agreement marks an end to long-running tension between the Chinese and North Korean state railway authorities over North Korea’s retention of up to 2,000 Chinese goods wagons and reluctance to repay loans.

The Hong Kong news magazine Yazhou Zhoukan recently reported that these issues had been resolved and that Qian’s grandly named company Hong Kong International has agreed to provide the North Koreans with 500 to 1,000 freight wagons. Qian told the magazine that “after six months of effort, there are now hopes of solving the railway transport bottleneck between China and North Korea”, and this would help to integrate the economy of the entire northeast Asian region.

Qian’s ambitions are not limited to railways. Not only has he expressed interest in investing in a North Korean coal mine, but Yazhou Zhoukan also reported that he hopes to set up a special economic zone in the North Korean border city of Sinuiju. He has clearly not been deterred by the unhappy case of Yang Bin, a Dutch-Chinese multi-millionaire who was made head of a similar development zone in 2002. Before Yang could take up his post, he was arrested by the Chinese authorities for tax evasion and other economic crimes and jailed for 18 years.

Qian, aged 41, is originally from the southern Chinese province of Guangdong and moved to Hong Kong in 1993. He has been involved in North Korea since the early 1990s, and has apparently established a fruitful relationship with Prime Minister Pak Pong-ju. He has said that “to invest in North Korea has been my dream” because three of his uncles fought in the Korean war; one was killed and one was seriously wounded. The Hong Kong investor has signed a plastics, tire and battery recycling agreement with North Korea and has expressed interest in investing in the country’s largest anthracite coal mine, which now produces only 1 million tons a year, compared with 3 million tons at its peak.

Tonghua Steel looks North
Meanwhile, state-owned Tonghua Steel or Tonggang, based in the northeastern city of Tonghua, expects to sign a 7 billion yuan ($865 million), 50-year exploration rights deal with the Musan iron ore mine, said to be North Korea’s largest iron deposit. Tonggang, Jilin province’s largest steelmaker, hopes to receive 10 million tons of iron ore a year from Musan as part of its plans to increase steel production from a projected 5.5 million tons in 2007 to 10 million tons in 2010.

The planned deal reflects China’s immense and growing appetite for steel. Although the country already produces 30% of global output, it is heavily reliant on imports and is concerned about rising prices. A Jilin provincial trade official said importing iron ore from North Korea was attractive because of low transport costs, which would increase Tonghua’s competitiveness.

Tonggang officials say they expect the deal to be signed soon, and that of the 7 billion yuan (US$866.1 million) pledged, 2 billion yuan will be invested in transport and power lines. Company president An Fengcheng said agreement had already been reached with China Development Bank on 800 million yuan worth of soft loans and 1.6 billion yuan of hard loans, while “the remaining investment will come in in stages”.

Rajin deal to give China Sea of Japan access
China’s export boom is one of the great economic success stories of the past 25 years, but it is constrained by a lack of suitable ports. In particular, the country lacks a port on the Sea of Japan, but after attempted deals with Russia came to nought, the inland Chinese border city of Hunchun has reached an agreement for a 50-year lease with the nearby North Korean port of Rajin.

The ceding of Rajin, an ice-free port with a handling capacity of 3 million tons a year, will give access to the sea to inland areas of northeast China which, at present, must send freight long distances by rail to the port of Dalian on the Bohai gulf. The agreement also provides for the construction of a 5-10 square kilometer industrial zone and a 67 kilometer highway, and envisages that the Rajin area will become a processing zone for Chinese goods which will then be re-exported to southeast China.

A Hunchun economic official stressed that the leasing of the port is “a business deal and not a government deal”. The South China Morning Post reported from Hunchun that the man behind the deal is Fan Yingsheng, a property developer from Hunan province who put up half the initial capital investment of 60 million euros (US$70 million). The sum could not be denominated in dollars for political reasons.

The paper quoted the United Nations Development Program as saying this sum would only be enough to build the road to Rajin, and far more would be needed to rejuvenate the port. The deadline for final agreement is December 30, 2006, and it remains to be seen if a final deal will be reached in time.

An unusually frank North Korean trade official noted the possible pitfalls as well as the advantages of such deals. Kim Myong-chol, head of the Korean Council for the Promotion of Foreign Trade, said the deals would have to involve importing “highly advanced technology and equipment”, and added: “These agreements are not easy to put into actual practice and can run into many problems so far as funding and bilateral cooperation are concerned.”

“Because the amount of money involved in these cooperative projects is quite large and [North] Korea will be investing ports, roads, etc, there are rather great risks in such investment, and in addition because the domestic Korean economy and its policies, laws and regulations, etc, are unclear, many problems are likely to arise in carrying out these plans,” Kim told a Chinese website.

Coal and gold
Such concerns may have been in the mind of the president of China Minmetals Corp, Zhou Zhongshu, when he signed “an agreement on setting up a joint venture in the coal sector of the DPRK” [North Korea]. The deal was signed in October when Chinese deputy premier Wu Yi visited Pyongyang, and is said to be the first of its kind. North Korean Vice Minister for Foreign Trade Ri Ryong-nam urged the Chinese side to “provide advanced technology and set up a good model for other joint ventures and cooperation between the two countries”.

North Korea also has substantial gold deposits, and a Chinese company plans to invest in a “semi-paralyzed” North Korean gold mine and refine the metal at its base in Zhaoyuan in Shandong province. Guoda Gold Co Ltd reached a preliminary agreement last year with Sangnongsan gold mine, which is said to have gold deposits totaling at least 150 tons.

Guoda deputy manager Lin Deming said his company was attracted to North Korea because of low labor, energy and transport costs as well as the “highly favorable” investment terms offered, but gave no details. Chinese investment in North Korea is certainly increasing, but final agreement on a number of deals has not yet been reached, and political factors such as uncertainty over Pyongyang’s nuclear weapons program may well discourage Chinese companies from moving too fast.

Michael Rank is a former Reuters correspondent in China, now working in London.