North Korean Economy Watch

From Joong ang Daily 
10/25/2006
Rah Hyun-cheol

The tour program to Mount Kumgang and the Kaesong Industrial Complex are certain to be affected by the crisis over North Korea’s recent nuclear test.

But they’re not the only ones ― South Korea has hundreds of smaller companies that have business deals with the North, with some actually operating inside the country.

And they were at a loss when the South Korean government announced it would “proceed with economic cooperation projects, but private companies are to decide on their own about their future investment plans in the North.”

According to the Ministry of Unification and the Korea International Trade Association, companies with records of trade with North Korea totaled 515 as of last year. That figure includes 379 trading firms and 136 companies that process imported materials, trading $420 million worth of products with the North. That amount accounted for 40 percent of South Korean trade with the North for the year, compared with 16.7 percent from the Kaesong Industrial Complex and 8.2 percent from the tour program to Mount Kumgang. Over the first eight months of this year, 395 companies have participated in trade with the North.

“It’s hard to predict what North Korea will come up with, and the South Korean government seems to be lost in its policy decision-making. Besides, the United States and China display different opinions. It’s nearly impossible to foresee the future,” said a head from one of those companies, who declined to be named. “I tried to grasp the real situation in the North by visiting on my own but had to give up the trip as China Southern Airlines shut down the route linking Beijing and Pyongyang.”

What the businesses fear the most is the possibility that trade with North Korea will be abruptly suspended if the North conducts additional nuke tests or economic sanctions against the country intensify.

A senior executive from Hanabiz.com, a firm in charge of dispatching North Korean workers in information and technology to Korean software companies in Dandong, China, said, “The recent nuclear test by North Korea has not dealt a serious blow yet to my company. However, it has become difficult to send cash to North Korean business partners after some Chinese banks restricted money transfers to the North.”

From the New York Times:
Jim Yardley
10/25/2006

[edited]Sanhe, China–Truckers carrying goods into North Korea across the sludge-colored Tumen River say inspections are unchanged on the Chinese side. Customs agents rarely open boxes here or at two other border crossings in this mountainous region, truckers and private transport companies say.

Nor are any fences visible, like the barrier under construction near China’s busiest border crossing at the city of Dandong. There were early reports that inspectors in Dandong were at least opening trucks for a look, but so far statistics and anecdotal reports in the Chinese news media indicate that, essentially, everything remains the same.

What is visible here, though, is the growing and, in some ways, surprisingly complicated trade relationship between China and North Korea. China remains North Korea’s most important aid donor and oil supplier, but, conversely, China is now importing growing amounts of coal and electricity from North Korea. Chinese entrepreneurs, meanwhile, are starting to buy shares in North Korean mining operations and, in one case, trying to gain access to the Sea of Japan by leasing a North Korean port as a potential shipping hub.

The upswing in Chinese economic activity — which is already raising questions about whether the intent is more strategic than commercial — is one of the reasons that China has sent mixed signals about how aggressive it will be in inspecting border trade to meet the United Nations sanctions. For now, at least, some truckers in this region say the only change in border inspections has come on the North Korean side, where customs agents are checking loads more carefully for items deemed contraband by Kim Jong-il’s government.

“We used to sit with North Koreans that we know and have a chat,” said Jiang Zhuchun, a trucker waiting to cross into North Korea on Tuesday afternoon. “But after the nuclear test, we are only allowed to sit alone in our trucks.”

The United States has praised China for approving the sanctions against North Korea, and Secretary of State Condoleezza Rice used her visit to Beijing last week to emphasize the common desire to restart diplomatic talks on North Korea’s nuclear program. China’s leaders are said to be deeply angered over the nuclear test and have signaled they may take a harder line against their longtime ally. Last week, some banks in Dandong froze certain accounts and financial transactions with North Korea.

But the question of inspections along the 866-mile border between China and North Korea is a different matter. The sanctions authorized countries to inspect cargo entering and leaving North Korea and barred the sale or transfer of material that can be used to make nuclear weapons. Yet the sanctions are still less than two weeks old, and some details have still not been worked out. For example, the sanctions ban luxury goods without defining them.

The United States wants tightened border inspections by China as a tool for squeezing the North Korean economy and ensuring that North Korea cannot buy or sell nuclear materials. China is worried that destabilizing North Korea could begin an exodus of refugees and has resisted changing inspections. This week, with rumors swirling about a possible border crackdown, the Foreign Ministry spokesman, Liu Jianchao, said China intended to comply fully with the sanctions, but also said inspections along the border would remain “normal.”

The Yanbian Korean Autonomous Region, the name of the sprawling district that includes the Sanhe border checkpoint, is not the primary trade route between China and North Korea; Dandong, with its more direct route to Pyongyang, the North’s capital, is by far the busiest. But the Yanbian area is wedged into a geopolitical hotspot where China, North Korea and Russia all come together.

In interviews and visits to three crossings from Yanbian into North Korea, truckers, transportation company agents, investors and others confirmed without exception that trade is continuing across the border much as it always has. Customs agents examine bills of lading but usually open shipments only when they are tipped in advance to someone trying to smuggle goods like beer or liquor without paying customs duties, several people said.

“No matter who you talk to, they will tell you there is not much difference,” said Jin Lanzhu, whose trading company is one of the largest in the region.

On Wednesday morning inside the Chinese customs yard in the border city of Tumen, small groups of North Koreans, each wearing their mandatory pins with images of either North Korean leader Kim Jong-il or his father, Kim Il-sung, waited to cross the bridge. They had nylon sacks stuffed with shoes and clothes, television sets, a refrigerator. Some carried bags of rice.

“How many bags do you have?” asked a female Chinese customs agent in a blue uniform. She looked them over and walked away without opening any. She did forbid the North Koreans to take several boxes of fruit because of a problem with worms. Then, the men began loading the sacks onto a flatbed truck operated by the customs office to carry smaller loads to the North Korean side. Two North Korean women complained to a local taxi driver that they had to pay 400 yuan, or about $50, for the service.

“They don’t really check over here,” one North Korean woman said of Chinese customs. “They do on the North Korean side.”

A similar scene unfolded later in the day at a smaller crossing in the dingy town of Kaishan, where the customs port is so small that trucks take a dirt road to a crumbling checkpoint. On Wednesday, a young soldier watched laborers load about 150 used televisions and boxes of medicine into a North Korean truck that had crossed the river to collect the shipment.

“I’m here for security,” the soldier said.

Trade between China and North Korea has grown rapidly in recent years — as has North Korea’s trade deficit with China, in part, because China no longer appears to be selling oil at a subsidized rate. China now accounts for almost 40 percent of North Korea’s total foreign trade; bilateral trade has more than doubled to $1.1 billion in 2005 from $490 million in 1995. In Yanbian alone, trade with North Korea jumped 82 percent in 2004 and another 20 percent in 2005, according to a local newspaper account.

Divining what the increased traffic says about the state of North Korea’s economy is a subject of debate. New research and interviews in the Yanbian region suggest that North Korea, a country that regularly suffers blackouts, is now exporting growing amounts of coal, minerals and even electricity to China, which is hungry for energy and raw materials. In exchange, North Korea is no longer importing as much raw material and machinery as it had in the past.

Instead, North Korea is importing food, clothes, daily sundries, outdated televisions and appliances and, of course, oil. The trend could suggest that North Korea’s recent experiments with private markets may be expanding, some analysts said.

A recent study by the Nautilus Institute, a San Francisco-based research group, used customs statistics to describe the trend, but also concluded that it might indicate that North Korea’s nonmilitary manufacturing industries were in sharp decline. One Chinese investor in a North Korean coal mine agreed. “They seemed to have stopped the factories,” said the investor, who asked not to be identified. He said doing business with North Korea was very risky and cautioned that numerous Chinese businessmen had lost money. “There are zero guarantees and protections.”

Even so, Chinese entrepreneurs and companies, both private and state-owned, are starting to buy interests in North Korean mines to export raw materials. The amount of investment is not clearly defined, but different Chinese proposals call for building truck routes between inland trade centers in northeast China to the North Korean coast, according to Chinese media accounts.

A Chinese property developer, Fan Yingsheng, told the Chinese news media that despite the nuclear test, he was still pursuing plans to develop the North Korean port of Rajin into a shipping center for goods from China. He said he would soon fly to Pyongyang to sign a final agreement.

The flurry of Chinese activity has not gone unnoticed by South Korea and others in the region, analysts say. Like China, South Korea has resisted harsh economic sanctions and refused to shut down its own trade deals with North Korea in part because of concerns about a swift collapse of the North Korean government. But South Korea is also positioning itself, to some degree against China, to be the dominant player in the future of North Korea.

China, meanwhile, has said the activity is not strategic positioning but natural economic outgrowth for a booming, entrepreneurial economy in need of resources. Li Dunqiu, a North Korea specialist with a research institute under China’s State Council, or cabinet, recently wrote that “laws of the market economy” were the driving force in Chinese investment in North Korea.

Along the border, it is easy to see how the daily traffic from China is a lifeline for North Korea. One woman from Yanbian said her family had recently come across to buy rice and other essentials. But Mr. Jin, the owner of the trading company, said charity was not at the essence of China’s trade with North Korea.

“The business interest is the most important thing,” he said. “Helping them comes after that.” Then, pausing to reflect on the potential and perils of trading with North Korea, he added: “North Korea is just like China in the past. It is a blank sheet of paper. You can draw wherever you want to. The question is whether the paper is going to be there at all times for you to draw on.”

Yonhap
10/23/2006 

North Korea plans to use a light-industry university in its border town of Kaesong to train technicians for an inter-Korean industrial complex in the town, a pro-Pyongyang newspaper in Japan said Monday.

“One of the demands by South Korean businesses operating in the Kaesong industrial complex is hiring competitive manpower from North Korea,” reported the Choson Sinbo, organ of the General Association of Korean Residents in Japan, citing an unnamed official of the Kaesong City People’s Committee.

“North Korea plans to nurture such talented people in Koryo Songgyungwan in Kaesong,” the official was quoted as saying.

To this end, the North is building a new campus to house more students on a site next to the existing Songgyungwan building, the newspaper said.

The industrial complex, located a few kilometers north of the inter-Korean border, is home to 15 South Korean companies that make goods for South Korean and foreign markets. They employed about 8,700 North Korean workers as of the end of last month.

As many as half a million North Koreans are expected to be working at the joint industrial complex by 2012, when it could likely house up to 2,000 South Korean companies, according to the Unification Ministry.

Seoul hopes its free trade agreement now under negotiations with the United States will recognize products made in Kaesong as South Korean-made, but Washington is against the idea.

Washington has also expressed skepticism about the inter-Korean project calling it a channel for North Korea to earn much-needed hard currency for its weapons of mass destruction development.

The Kaesong complex is one of the joint economic achievements the Koreas have so far made in the wake of their historic summit talks in June 2000.

From the Choson Ilbo:
10/23/2006

N.Korean Party ‘Takes 60 Percent of Kaesong Wages’
 
More than half the salaries paid to North Koreans working at the inter-Korean Kaesong Industrial Park go to the North Korean Workers’ Party, a document written by a team in charge of inter-Korean economic cooperation at the Ministry of Commerce, Industry and Energy shows. The team reported to the unification minister.

Grand National Party lawmaker Kim Gi-hyeon made the document public on Sunday. According to the memo, US$30 out of the monthly pay of $57.50 goes to the Workers’ Party. With $17.50 spent on insurance and other costs, North Korean workers at the complex are left with only $10 a month.

The Unification Ministry has publicly claimed that workers get $66 on average, with 30 percent spent on benefit packages of workers, like housing and medial expenses, and 70 percent going to the workers. A Unification Ministry official on Sunday denied the report. “It is the first I’ve heard about $30 going to the party,” he said. “How could the Industry Ministry know about something that the Unification Ministry didn’t know? We have no idea.”

From the Korea Times:
10/22/2006
Kim Sue-young

Fines on Mt. Kumgang Tourists Rise

An increasing number of tourists have been fined this year at Mt. Kumgang in North Korea, the Ministry of Unification reported yesterday.

Some 1,177 fines were levied by North Korea from January to July, the highest figure to date with $16,800, being paid to the North’s officials according to the report. (more…)

From the Joong Ang Daily:
10/19/2006
Seo Ji-eun

Hyundai Asan Corp. is facing another tough challenge to its Mount Kumgang tour operation amid mounting pressure to suspend business due to suspicions that it has inadvertantly helped North Korea develop nuclear weapons.

So far the company is still in business, but it may be forced to withdraw.

U.S. Assistant Secretary of State Christopher Hill said on Tuesday that the Mount Kumgang tour “seems to be designed to give money to the North Korean authorities.”

According to Hyundai Asan, North Korea has received up to $457 million since 1999 in return for allowing Mount Kumgang tours.

Experts point out that the reason the United States opposes the tourism business while not objecting to the Kaesong Industrial Complex, also operated by Hyundai Asan, is because the majority of payments from the tour company go directly to the North Korean government. Kim Sung-han, head researcher at the Institute of Foreign Affairs & National Security, said, “The United States views the Kaesong Industrial Complex as acceptable in that the major portion of capital injected into that project consists of labor costs of the North Korean workforces in actual operation there. However, Mount Kumgang is understood as being mainly for the sake of the regime.”

Political critics speculate that U.S. Secretary of State Condoleezza Rice, in a meeting with the President Roh Moo-hyun scheduled for today, may officially request a halt for the program. There is speculation of a second North Korean nuclear test, which would likely increase international sanctions against the North.

Officials at Hyundai Asan are discussing ways to retain the tour business, which accounted for 40 percent of revenue last year. Tourists to the scenic resort in the North have sharply decreased of late, making it hard for Hyundai Asan to achieve its annual goal of 350,000 visitors.

The North Korean business arm of Hyundai Group is mulling the delivery of rice, medicine and fertilizer to sustain cash flow and quell notions that it is aiding North Korea.

An executive from Hyundai Motor Co. said, “We are afraid consumers in the United States might be confused. We have no choice but to explain that Hyundai Motor and Hyundai Asan belong to different groups.”

From the Joong Ang:
Ministry: North got $1 billion since 1998
10/18/2006
Lee Young-jong
Ser Myo-ja

The Unification Ministry yesterday defended itself against accusations that the Roh Moo-hyun administration and its predecessor, that of Kim Dae-jung, were at least partly responsible for giving the North the cash it needed to fund its nuclear weapons programs.

Ministry data released yesterday said that South Korea sent nearly $1 billion in cash to the North from March 1998 until August of this year. The ministry said those payments were in connection with “legitimate economic activities.” Nearly half of that cash flow, it said, was from tourism receipts at North Korea’s Mount Kumgang resort, and almost all the remainder was a $500 million payment by Hyundai Group to North Korea for exclusive rights to run the tours.

When Hyundai Group first began the tour program in 1998, Lim Dong-won, then the Blue House senior secretary for security affairs, ordered the Unification Ministry to devise ways of monitoring the payments to ensure that they were not diverted to military uses. But a Unification Ministry official recently admitted the obvious: “There was and is no way to see how the North spent the money,” he said.

The same is true in the other inter-Korean programs, although the amounts are relatively smaller. Nearly $21 million has been paid to the North in the Kaesong Industrial Complex project, including the wages of 800 North Korean workers there. The few million dollars remaining in the total were payments for South Koreans to attend events such as the annual Arirang Festival.

The ministry’s statement yesterday said the Hyundai payment of $500 million was made in August 2000. In fact, it was made in June, just before the first inter-Korean summit that month, and a special counsel who looked into the then-secret payment described it as an inducement for North Korea to agree to the summit. Seven persons were later convicted of violating Korea’s foreign exchange laws in connection with the matter.

Critics on the right believe the ministry’s estimates are woefully incorrect; the Grand National Party, for example, has put the amount at $8.4 billion over the past eight years.

The ministry also challenged the Grand National Party’s argument that South Korea had spent nearly 2.2 trillion won ($2.3 billion) for a failed light-water reactor project in North Korea.

The ministry said the figure was only about 1.4 trillion won.

It also noted that that project was an international one and had begun under the Kim Young-sam administration in 1994. Only a tiny part of that funding involved cash payments to North Korea, the ministry said.

From NK Zone:
Michael Rank
10/15/2006

The Chinese businessman who is planning to develop the North Korean port of Rajin under a 50-year agreement with the border city of Hunchun says the deal remains on track despite NK’s nuclear test.

Fan Yingsheng, a property developer from Hunan province, said a road between the two cities should be completed within 15 months but gave few other details.

He told the Shanghai Evening Post [in Chinese] that U.N. sanctions “are something that we are expecting, and won’t have much effect on us.”

“After the nuclear test, North Korean colleagues did not tell my company about anything being different, I didn’t even receive any phone calls from them, which shows that it’s business as usual.

”So I am still planning to fly to Pyongyang to sign an agreement as planned, and haven’t thought of changing my schedule.“

Fan was speaking from Hunchun on October 12, shortly after meeting a group of North Korean officials, and was about to head across the border to Raseon where his company apparently has its main North Korean office. He said this visit had been scheduled a month ago.

The ceding of Rajin, an ice-free port with a handling capacity of three million tonnes 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 km industrial zone and a 67 km highway, and envisages that the Rajin area will become a processing zone for Chinese goods which will then be re-exported to southern China.

Fan is reported to have put up half the initial capital investment of 60 million euros ($70 million). The sum could not be denominated in dollars for political reasons.

Fan said in July that the Chinese side had approved the leasing of the port as had the city of Raseon, and “all we are waiting for is for the Korean central government to give its approval…”

From Yonhap:
Suspension of inter-Korean business only hurts S. Korea: official
10/13/2006

Suspending South Korea’s joint business projects with North Korea would do more harm to the South than the North while doing little to convince the communist state to halt additional nuclear tests, a ranking South Korean official said Friday.

“Cutting off (inter-Korean economic projects) now would only show our firm will (to retaliate against North Korea for its claimed nuclear test) by inflicting wounds on parts of our own body,” the official told reporters, asking not to be identified.

“The damage North Korea would suffer would be very insignificant compared to the damages we would suffer,” the official added.

The remarks came amid calls from here and abroad for the Seoul government to immediately halt cross-border business projects with the North in retaliation for the North’s claimed nuclear test on Monday.

The main opposition Grand National Party (GNP) claims the country’s economic cooperation for the impoverished North has helped the North’s missile and nuclear weapons program.

“In the current situation, (South Korea) must strengthen its alliance with the United States and actively participate in U.N. Security Council sanctions on the North while cutting off all of its cash assistance to the North,” GNP floor leader Kim Hyong-o said Friday at a party leadership meeting.

An average of 40,000 South Koreans travel to a scenic resort on North Korea’s Mount Geumgang every month, paying about US$1 million in admission fees to the North, according to Hyundai Asan, the South Korean developer of the resort.

Fifteen South Korean companies also pay about $600,000 a month on average to North Korea in wages for the 8,700 North Korean employees at an industrial complex being developed by the two Koreas near the North’s border town of Kaesong, according to the Unification Ministry.

The government official, however, said the government had no immediate plans to scrap the inter-Korean projects, claiming the money paid to the North through the projects is not aimed at assisting the North’s weapons program and that the amount is insignificant.

He said the country would align its North Korea policy and economic cooperation with a U.N. Security Council resolution when one is passed, but claimed a U.S. draft of the resolution, even if approved by the Security Council, would not call for a suspension or reduction of inter-Korean economic cooperation.

“Vice Foreign Minister Yu Myung-hwan said at the National Assembly Thursday that there is nothing in the U.S. draft resolution” that would call for a suspension of the two cross-border projects, the official said.

From the Joong Ang Daily
10/13/2006
Seo Ji-eun

Hyun Jeong-eun, the Hyundai Group chairwoman, may face a serious problem soon: If tourist departures for the North Korean resort area of Mount Kumgang continue in their slump, should she end the operation? And if she does, what happens to the Hyundai Group’s leading role in developing business ties with North Korea, including its exclusive right to conduct tours there for South Koreans?

Hyundai Asan, the group subsidiary that operates the tours, said yesterday that only 549 tourists traveled to the mountain area, now ablaze in fall colors. A day earlier, the number was 788. The company said that 4 percent of its travelers canceled on Monday, when the North announced that it had conducted a nuclear test; yesterday, 65 percent of those who had signed up for the trip cancelled.

Even if the problem continues long enough for an “ordinary” company to think about pulling out of the business, Hyundai’s problem involves other elements of the group and more than just cash flow.

Hyundai Asan won exclusive rights to an inter-Korean tourist business in late 1998, and has set a goal of expanding its corporate sphere across the country. It plans to take tourists to Kaesong and to Mount Paektu and has an ambitious construction program to support. Shutting down the Kumgang tours could endanger that strategy because of North Korea’s long memory and penchant to hold grudges. Once out, Hyundai fears it may never again get in.

North Korea has earned about $500 million so far from the Mount Kumgang tours.

And Hyundai Group’s heritage is bound up in North Korea businesses. Cross-border business dealings were initiated by Chung Ju-yung, the group’s founder, and that business was inherited by his son, Chung Mong-hun, who committed suicide during his trial on charges of helping secretly funnel cash to the North to set up the first inter-Korean summit in 2000. Since Ms. Hyun succeeded her husband three years ago, her husband’s other brothers have been jockeying to seize control of the group from her through stock transactions, in order to reinstate the direct blood line from the group’s founder to its current management.

Ms. Hyun has often stressed that it is she who is the true champion of the founder’s spirit through her persistence in conducting business with North Korea.

In the view of some analysts, that argument could be weakened significantly by shutting down the tours, perhaps inducing group subsidiaries such as the Hyundai Department Store chain, which has remained neutral in the family feud, to turn against Ms. Hyun.