Archive for December, 2005

Kim Jong-il Vows to Beat Hollywood at its Own Game

Monday, December 5th, 2005

Choson Ilbo

North Korean leader Kim Jong-il, a reputed film buff, has reportedly vowed his impoverished country’s movies will win the competition with U.S. films. The Washington Times on Sunday said the remarks were quoted by Kim Man-sok, the head of overseas sales at North Korea’s Pyongyang Film Studio.

The paper said the dear leader made the statement to encourage North Korean filmmakers during a visit on location. “We are not competing with U.S. and European films. We have to beat U.S. films,” it quoted him as saying. The daily concluded the North’s “first potential international blockbuster already is in the pipeline.”


Psychiatrist with a head for business

Saturday, December 3rd, 2005

Asia Times
Michael Rank

From psychiatrist to international banker and gambling tycoon is an unusual career path, but Hong Kong-born Dr Johnny Hon says it makes quite a lot of sense. “Wealthy clients need a psychiatrist more than they need a banker,” he quipped. “Training in psychiatry makes you understand clients better. Most of them are elderly. They are concerned about their health and how to plan for passing their wealth down to their children.”

Hon, 34, was awarded a PhD in psychiatry from Cambridge University in 1998, but left medicine for finance after being recruited by the Dutch bank ABN AMRO as a private banker in Hong Kong. He didn’t stay with the Amsterdam-based bank long, however, and now has his own business empire, Global Group (Europe) plc, stretching from a joint venture bank in North Korea to a stake in a lottery in China, not to mention another bank in the Comoro Islands off Madagascar and an online gambling company in London.

Hon’s business ventures tend towards the exotic, but in an interview at his headquarters in London’s Docklands financial district he came across as measured and affable – even if I never did quite understand how he switched from a dissertation on the association between Down’s Sydrome and Alzheimer’s disease to international finance.

This has been a big year for Hon, who in June opened the Koryo Global Credit Bank in Pyongyang and in July announced the signing of a contract to co-manage the state sports lottery in the southwestern Chinese province of Guizhou.

Under the deal with Guizhou, Hon’s UK company, Betex, became the first non-Chinese company to become involved in gambling operations in mainland China (although numerous overseas gaming firms are involved in the Macau SAR). Gambling is illegal in China, with the big and fast-growing exception of state-sponsored lotteries, currently worth US$4.8 billion a year, although illegal gaming expenditures are estimated at 10 to 15 times as much, according to a recent Deutsche Bank report.

The Chinese government is aiming to cash in on the huge illegal gaming market through a vast network of video lottery terminals, and Deutsche Bank says “these measures will help lottery capture 40-50% of the illegal gambling market over the next three years”. Hon said his company had invested about 1.75 million British pounds ($3.05 million) in Guizhou, where there were currently 780 lottery sales points. These will be upgraded to give results in real time rather than be downloaded twice a day.

“So far we are involved only in Guizhou,” one of China’s poorest provinces, he said. “But we will hopefully speak to more provinces. Gaming in China has a lot of potential.” Underlining this potential, Deutsche Bank has cited the Peking University Center for Lottery Research as valuing illegal gambling activities in China – including underground casinos, slot machines, black market sports betting, and illicit lotteries – at around $75 billion. State lotteries are supposed to hand a proportion of their profits to charity and to sports development bodies, but corruption is said to be rife.

Hon said he was “taking a cautious approach” with his bank in North Korea, in which Global Group has a 70% stake and state-owned Koryo Bank has 30%. Stalinist North Korea is notoriously closed and secretive, but Hon said up to 200 foreign business people lived in Pyongyang and the country was gradually developing a market economy. He said he was “very bullish” about the future of North-South Korean economic cooperation, and stressed the potential of the Kaesong industrial zone, where a large number of South Korean companies have opened factories.

Hon noted that China’s economic reforms had been greatly boosted by overseas Chinese entrepreneurs from Hong Kong and Taiwan, who have cultural, linguistic and family ties with the mainland, and South Koreans and overseas Koreans could make a similar contribution to North Korea’s economic development.

“I keep telling my North Korean friends to make use of the huge resources and capital from South Korea,” Hon said. “Labor costs are even cheaper than China … People are well educated and have good discipline. They need the right economic policies.” Regarding North Korea’s relations with the West, Hon said: “There have been a lot of misunderstandings on both sides … There is a big gap in how they read the West and how we read them.”

Hon noted that Macau billionaire, Stanley Ho, had a casino in Pyongyang, and said that “maybe I will talk to him a bit about banking arrangements”. But he denied that he had any involvement with North Korea’s reported online lottery venture, which is aimed mainly at South Koreans. North Korea is highly puritanical and its citizens are barred from the Pyongyang casino, whose main customers are Chinese entrepreneurs and tourists.

Hon said he was motivated not simply by money, but also wanted to “make positive contributions” to impoverished Third World countries. “I came to the conclusion that you can do more good to help more people by making money first,” he added.

This was part of the reason why he founded a bank on the tiny, impoverished island of Anjouan in the Comoros in 2002. The Comoros, in which Anjouan has autonomous status, have endured 19 coups or attempted coups since gaining independence from France in 1975, and Hon wryly admitted that “at the moment the bank has caused me more problems than it is worth”. He founded the bank after he was “asked to help” by the president of Anjouan to assist in drafting new financial laws and setting up an offshore banking industry on the Indian Ocean island.

Global says it is the only company authorized by the government of Anjouan to market financial and banking licenses. But the company says some websites allege that this is not the case and that Global is challenging this in the courts.

Hon, a British citizen, was educated in Britain from the age of 13 and says on his website that in just six years he “has built up a mini conglomerate, with interests in banking, property development, gaming, finance and leisure and from which the combined turnover in 2005 is expected to reach well in excess of 1 billion British pounds. Even more remarkable is that whilst building the Global Group of Companies from scratch, he has managed to pursue so many other interests both charitable and political.”

On the charitable side, Hon was part of a team that provided North Korea with 120 wheelchairs after a large explosion on a railway line last year in which 169 people died. There was speculation, strongly denied by the North Korean government, that the explosion was a failed assassination attempt against the country’s all-powerful leader, Kim Jong-il.

On the political side, Hon is a business supporter of Britain’s governing Labour Party, and a signed photograph of Prime Minister Tony Blair “to Johnny and all at Global” is on prominent display in the company’s boardroom. In Britain, his gaming company, Betex, is seeking a listing on the Alternative Investment Market, which has a more flexible regime than the main stock exchange, while Hon is also actively seeking business partners for tourism ventures in the Caribbean. Hon said he employs 115 people worldwide, mainly in Britain but including about 10 in China and seven in North Korea.

His other interests include helping Chinese companies get a stock market listing in London. These companies span a wide range of sectors, from biotechnology to education and tourism. On his website he lists some 30 companies of which he is founder or director, and states that Global Group “is growing at a rapid rate, employing more and more staff and operating in more diverse areas than ever before. Under Johnny’s chairmanship the group is certain to go onwards and upwards.”

Hon definitely seems like a man to watch, and you never know in which exotic corner of the world he is going to turn up next.


Aid Strengthens Kim’s Regime

Thursday, December 1st, 2005

Nautilus Institute
Andrei Lankov

The recent news out of North Korea leaves no room for doubt. After a decade of grudgingly allowing small-scale free markets, Kim Jong Il’s regime is seeking to reimpose total control. Ironically this turning back of the clock is being aided by the “no strings attached” aid policies of two countries, China and South Korea, which claim to be trying to encourage reforms.

From early October, all trade in grain has been forbidden in the small private markets that mushroomed across North Korea when the state-run food distribution system largely collapsed during the famine of the 1990s. North Koreans are now expected to rely on a revived public distribution system for supplies of grain. Special teams of officials have fanned out to check farming households for any “excessive” supplies of grain they might try to sell in the private markets, and ensure they are left only with their officially allowed ration of 700 grams a day.

Internal travel controls are also being tightened. During the famine, authorities turned a blind eye to violations of the regime’s tough restrictions on freedom of movement, as starving North Koreans crisscrossed the country in search of food. Now these are being enforced once again, with North Koreans required to obtain a travel permit from police before they can travel elsewhere in the country.

Pyongyang’s moves in this direction should not come as a surprise. Allowing even a minimal degree of private enterprise reduces the regime’s absolute control over its citizens — especially if they are no longer dependent on the state for their food — and provides firsthand evidence of the existence of a more successful economic system. The Kim regime has seen how economic reform preceded the collapse of Communist regimes across Eastern Europe. It’s no coincidence that one of the questions most commonly heard in private conversations with members of the Pyongyang elite these days is about the fate of Communist cadres in the former East Germany. To avoid reforms is the surest survival strategy for Pyongyang’s ruling elite.

Throughout the past decade, the regime had no choice but to tolerate some degree of private economic activity, because of the collapse of its state-distribution system. But now that the North Korean economy has bottomed out and the famine appears to be over, largely due to generous aid shipments from the outside world, the Kim regime is in a position to get rid of changes that it never wanted in the first place. In addition to trying to curb the activities of private markets, it’s ordered most of the representatives of the international aid agencies that it reluctantly allowed into the country during the famine to leave by the end of the year.

The Kim regime can afford to act in this way because it knows that food aid from its two key patrons, South Korea and China, will keep flowing come what may. These now exceed shipments from elsewhere in the world. According to a recent report to the U.S. Congress, North Korea received 350,000 tons of food aid from South Korea and China in 2004 — compared with 325,000 tons from the World Food Program. Seoul also provides the North with much needed fertilizer, while China takes care of most of its energy needs.

China and, especially, South Korea claim to be supplying aid as part of a strategy of encouraging North Korea to embrace economic reform. That’s the ostensible aim of Seoul’s “sunshine policy” of one-sided concessions to the North, while Chinese leaders have shown visiting North Korean leaders around Shanghai and Shenzhen in an effort to encourage it to follow the same path. But, far from encouraging reform, North Korea’s recent actions show that it can take advantage of such unconditional aid to move in the opposition direction.

While Western countries insist on their aid being monitored by international relief agencies to try to prevent its diversion to the military, South Korea and China take a much more forgiving stance. Beijing wants stability on its borders, and would not be happy to see another nominally Communist regime collapsing. South Korea also wants to avoid the collapse of the Kim regime, since it would then have to foot the bill for an expensive and socially ruinous German-style unification. This means that both governments are ready to ship aid without asking too many awkward questions or demanding that it be closely monitored. Although ostensibly encouraging economic reform in North Korea, in reality both China and South Korea share the same short-term goal of preserving the status quo. They tacitly understand that means the regime must be able to continue to rely on its police and elite army units, and so needs to keep them well fed. That means turning a blind eye to the diversion of aid to the military, police and other members of the Pyongyang elite, even at the expense of the long-suffering North Korean people.

In the long run, this creates a paradox. Unless Seoul and Beijing are willing to foot the ever growing bills from Pyongyang indefinitely, they need to promote reforms there. However the North Korean regime has shown it has no interest in implementing reforms except when it is the only way to survive.

That creates an uneasy dilemma, which is shared by other foreign aid donors to North Korea. Stopping all aid could lead to renewed famine, especially in those areas of the country closed to foreigners. But excessive and unconditional aid is likely to halt all reforms, since the Pyongyang government would simply reverse to its old policies, using foreign aid to pay for the system’s inherent inefficiencies (and perhaps for a bit of luxury for Kim and his cronies). And recent events have clearly demonstrated have how counterproductive showering North Korea with aid can be.


Steps towards the real world

Thursday, December 1st, 2005

The Banker and FDI magazine

Information hollow

For a financial journalist the DPRK represents a serious challenge. Understanding the economy and the banking sector of a country is never easy, but when no data is published by the government or the central bank it becomes significantly more difficult. I knew information was scarce but believed that the two very agreeable government minders, assigned to monitor my every move in my four-day visit, would be able to help me extract a simple list of banks operating in the country. No such luck. Although my visit was welcomed, the central bank (which acts as both the issuing bank and as a fully operational commercial bank in the traditional socialist model) failed to provide the list (or anything else), despite numerous requests.

Although the consensus after several interviews was that around 20 banks of various types exist, I can only vouch for the handful listed here. Clearly the Foreign Trade Bank (FTB) represents a pivotal bank in the financial system and Ko Chol Man, director of the FTB, was keen to explain the peculiarities of the DPRK banking system. “The domestic and foreign exchange settlement systems are completely separate. The central bank deals with the domestic market and money issuance and it also has a commercial banking role; the FTB has complete control over foreign exchange matters and trade and also holds the country’s foreign exchange reserves.”

Unlike other banking systems, the FTB in the DPRK acts as a clearing house for the foreign exchange activities of the banks in the country. It does not report to the central bank but, like all banks, reports to the State Fiscal and Financial Committee (SFFC), the overall banking regulator.

Mr Ko was pleased to note that the FTB had around 500 correspondent banks worldwide and, along with its 600 staff (including 11 branches) in North Korea, had six representative offices outside the country (including offices in Austria, Russia and China) and planned to establish a UK representative office in London. However, when asked for details of FTB’s banking activities he replied bluntly that no banking institution had published its figures in terms of activities or balance sheet. “We cannot give figures about the size of our assets because it is a regulation of the state. If the situation becomes better we can make them public but up to now it is impossible.”
Economic estimates

Despite the absence of official economic and banking data, various estimates help make the picture a little less murky. A recent Standard Chartered Bank report places North Korea’s nominal GDP at the end of 2004 at $22bn or $957 in GDP per capita terms for the country’s 23 million population; by comparison, South Korea’s nominal GDP is put at $680bn or $14,167 per capita for its 48 million population. While the unification of the two Koreas is seen as an important political objective, especially in Pyongyang, the startling economic gap between the two states could mean that the North becomes a huge burden on the South, and Seoul well recognises the economic problems that emerged from the reunification of Germany in the 1990s.

Meanwhile, Jong Msong Pil, of the Institute of Economy at the Academy of Social Science, explained how the economy had declined dramatically from a GDP per capita of $2500 in the mid-1980s to $480 per capita in 2000.

“The big drop was caused by the disappearance of the socialist market worldwide in the early 1990s; the collapse of our socialist barter trade system led to the failure of many enterprises and a decline in living standards,” he said.

Dr Jong noted that, following the hard times of the mid-1990s, the first target of the national economy has been self-reliance. He added that no economic data had been published since 2000. He believed, however, that 10% economic growth occurred in 2004 and, responding to reports from the World Food Programme (WFP) that a third of the population were malnourished, he said the food situation was improving. “In our country, all people have a job so for this reason no one has died of starvation or hunger. Our country is a socialist planned economy so the government takes care of people’s living.”

Acknowledging shortages in the past, Dr Jong said that in October the government had normalised the public food distribution system, which indicated the government was now supplying sufficient food.

Is the DPRK’s food crisis over? Driving around Pyongyang’s spacious avenues (with two minders) there was no visual evidence of malnutrition – but the capital is likely to be much better served than elsewhere. A supermarket was shown but the goods were only available for foreign currency, hardly food for the masses. Cha Yong Sik, deputy director general at the Ministry of Foreign Trade, said the government had not imported food on a commercial basis in 2005, unlike previous years, but neighbouring countries are still providing significant food aid. Richard Ragan, country director of the WFP, said food production in 2005 was up 10%, with cereals up 6.6%. But while the food situation may have improved, the DPRK is said to be still dependent on food aid.
Trade predictions

So what are the DPRK’s prospects? Much depends on the outcome of the nuclear negotiations but estimates from the Seoul-based Korea Trade-Investment Promotion Agency (KOTRA) say the DPRK’s trade volume in 2005 is expected to pass $3bn for the first time since the fall of the Soviet Union with the figure likely to reach $4bn if inter-Korean trade is included. Trade with China, the DPRK’s largest trading partner, grew by more than 40% in the first half of 2005, indicating Pyongyang’s growing dependency on Beijing.

Upbeat on trade prospects, Mr Cha explained that the recently opened Tae-an Friendship Glass Factory, built with a $32m donation from the Chinese government, would export 40% of its 300-ton capacity, mainly to Siberia. Also Pyongyang’s first autumn international trade exhibition in October included companies from six European countries, the focus being on the country’s mineral potential rather than its manufacturing abilities, which are a long way off.

As for banks, the group of up to 15 joint venture banks are helping to finance the country’s 150 or so international companies. But do not expect miracles. The latest, Koryo Global Credit Bank, set up in June, is a joint venture between the UK-based Global Group, headed by Hong Kong businessman Johnny Hon, with 70%, and the state-owned Koryo Bank with 30%. Established with a paid-up capital of e10m, KGC Bank is ambitious in its plans to engage the DPRK in trade and commercial relations with the rest of the world, especially Asia, the Middle East and Europe.

KGCB’s first correspondent banking relationship in Europe is with Germany’s Helababank. The bank, the first product of cooperation in the finance field between the DPRK and the UK, has a staff of five and is also interested in investing in property. It was also able to produce, at the instigation of US authorities, a comprehensive anti-money laundering file.

Another local venture is North East Asia Bank (NEAB), which was set up by ING Group in 1995 but is now wholly owned by the Korean BOHOM Group. Amazingly, Kim Hyon Il, NEAB’s president, produced a balance sheet showing total assets of e79m at the end of 2004 and a paid-up capital of e25m. He also showed me the bank’s newest product, a chip-based cash/debit card, the first in the DPRK. The card demonstrates perhaps that the country is slowly joining the real world – but with only 100 issued and only 13 outlets available, the service has a long way to go.


Political effects

At Daedong Credit Bank, chief executive Nigel Cowie explained how international politics can have a dramatic impact on banking even in the isolated DPRK. In September, just before the conclusion of the fourth round of the Six-Party Talks, the US Treasury accused Banco Delta Asia (BDA), a Macao-based bank, of aiding the DPRK in a series of ‘money laundering’ cases. The Wall Street Journal had said the Macao crackdown was Washington’s method of cutting off Pyongyang’s financial sources for its nuclear weapons programme.

Mr Cowie, a former HSBC banker, explained that all DPRK banks had accounts with BDA for the purposes of remitting funds and, as a result, the accounts were suspended pending an inquiry in mid-November. While Stanley Au, chairman of BDA’s parent, denied the US allegations and BDA’s involvement in any illegal business relations with DPRK banks, the damage is done. “It affects our customers because it affects people’s ability to remit money to and from the country. I imagine that this will cause people doing legitimate business to give up,” says Mr Cowie.

The nuclear negotiations remain critical to the country’s future and the Chinese, in particular, want them to succeed. But that is just a start. There is evidence that the DPRK is opening up and changing with reports that there are 300 open markets operating across the country, 30 in Pyongyang. But whether the DPRK follows the China model of 25 years ago and can restructure its ‘powerful socialist nation’ doctrine remains doubtful under the current leadership.