RECENT TRENDS IN PRC-DPRK ECONOMIC RELATIONS AND

UNCLAS SEOUL 001031

SIPDIS

SENSITIVE
SIPDIS

NSC FOR CHA

C O R R E C T E D C O P Y - PARA 1 AND 2 CORR'D


E.O. 12958: N/A
TAGS: PREL ECON EAID KN KS
SUBJECT: RECENT TRENDS IN PRC-DPRK ECONOMIC RELATIONS AND
IMPLICATIONS FOR INTER-KOREAN COOPERATION


SUMMARY
--------------


1. (SBU) Chinese economic ties with North Korea have
expanded greatly in the past two years. Although the ROKG
welcomes the stabilizing effect that Chinese trade and
investment brings to the DPRK, it is alarmed at the
PRC's growing influence, to the point that ROK officials
now routinely assert Beijing is attempting to turn
North Korea into the "fourth province of Northeast
China." In the worst case, Seoul fears Beijing will
turn the DPRK into a client state and the ROK will
lose forever the opportunity to reunify the Korean peninsula.
Accordingly, as Chinese influence in the DPRK
continues to grow, the ROK will feel increasing
pressure to undertake a dramatic expansion of its own
engagement with the North. END SUMMARY.

CHINA REMAINS DPRK'S BIGGEST TRADING PARTNER
--------------


2. (U) According to the Korea International Trade
Association (KITA),trade between North Korea and China in
2005 hit a new high of USD 1.58 billion. As a result, the
PRC continues to be the DPRK's biggest trading partner and,
according to preliminary figures, is likely to account for
over 50 percent of North Korea's overall trade in 2005.

(NOTE: Because most of the data on DPRK trade is based on
mirror statistics collected by the Korea Trade & Investment
Promotion Agency, exact annual figures on DPRK overall trade
are usually not available until July of the following year.
END NOTE.)

North Korea's trade with China is increasingly unbalanced,
however, as its trade deficit with China nearly tripled in
2005, from USD 212 million in 2004 to USD 588 million.
Imports rose 36 percent and exports dropped 14.3 percent
during the same period.

HUGE GROWTH IN INVESTMENT IN TWO-YEAR PERIOD
--------------


3. (U) Chinese investment in North Korea has also
increased dramatically in the past two years. Chinese
investments, generally in the form of joint ventures, are
mostly channeled to finance various resource and
infrastructure projects in the North. In return, investors
(most of whom are based in China's three northeastern
provinces) are guaranteed special rights to use resources
and ports for a certain period of time. The Ministry of
Unification (MOU) estimates that PRC investment in 2005
doubled from USD 50 million in 2004 to a total of USD 100
million, accounting for approximately 85 percent of all
DPRK in-bound investment. The surge in Chinese direct
investment is even more pronounced when comparing the
2004 and 2005 figures with the 2003 figure of only USD 1.1
million.

FOOD AND ENERGY ASSISTANCE
--------------


4. (U) China remains one of the primary sources of food
and energy assistance to the DPRK. According to estimates
provided to poloff by the Ministry of Unification (MOU),
the PRC is the source of approximately 60 percent of the
DPRK's total energy imports (both commercial and non-
commercial). The MOU also estimates that China gave a
substantial amount of energy and technical assistance to
the North in the form of long-term loans between 2001 and

2005. China has tried to reduce the financial burden of
its bilateral relationship with the DPRK by substituting
trade and investment for assistance. The chronic trade
deficit that the North has with the PRC, however, suggests
that a large portion of bilateral trade is 'de facto' aid.

JAPANESE TRADE DECLINES, CHINA FILLS THE VOID
--------------


5. (U) The sharp increase in PRC-DPRK trade is in
contrast to the result of a steady decline in the
DPRKs trade with Japan as mounting political tension
surrounding the nuclear and abductee issues has cut
into bilateral economic ties.

According to KITA, the level of Japan-DPRK trade declined
from USD 1.3 billion in 2001 to USD 195 million in 2005 (an
annual average decline of 32 percent),the lowest since

1977. Japan's share (17.8 percent) of North Korea's
overall trade in 2001 was even greater than that of South
Korea (15.1 percent),making it the second largest trading
partner to the DPRK after China (27.6 percent); by 2004,
however, Japan had fallen to fourth place with a mere 7.1
percent share in the DPRK's overall trade, behind China
(39.0 percent),the ROK (19.6 percent),and Thailand (9.3
percent).


6. (U) At the same time, the recent decline in
international aid has led Pyongyang to depend more on
imported food and energy. In fact, food and energy
comprise the top import items in the DPRKs trade with its
major trading partners, especially China and Russia.

PRC SEEKS STABILITY, INFLUENCE AND TWO-KOREA STATUS QUO
-------------- --------------


7. (U) South Korean analysts see China's increasing
economic engagement in North Korea as reflecting Beijing's
strategic interests in: (1) preventing a North Korean
collapse, which could in turn have a destabilizing effect
on its own domestic security; (2) maintaining Chinese
influence on the Korean peninsula, and thus check U.S.
influence in the region; and (3) sustaining the two-Korea
status quo. For the PRC, North Korea could be a major
source for raw materials. At the same time, North Korea
remains an ever-increasing market for Chinese goods. Based
on these economic advantages, some analysts point to the
possibility of China incorporating the DPRK into its
development plans for its three northeastern provinces
(Jilin, Liaoning and Heilongjiang).


8. (U) South Korean analysts also see North Korea
seeking to increase its economic relations with
the PRC to balance the growing economic leverage of
the ROK (which is still considered a serious threat
to the Kim Jong-il regime). The DPRK's interest in
developing its backward economy has also played a role
in cultivating Chinese economic involvement in the DPRK.

USD 2 BILLION IN CREDITS?
--------------


9. (U) Meanwhile, PRC-DPRK economic ties were also given a
major boost by high-ranking political and economic
exchanges. In particular, various bilateral institutional
agreements to promote bilateral investment, and economic &
technological cooperation were adopted during DPRK Premier
Pak Pong-jus visit to China in May 2005 and President Hu
Jintaos October 2005 visit to the DPRK. Media reports
indicate that the "Economic and Technological Cooperation
Agreement" adopted during Hu's visit is worth USD 2 billion
in trade credits and investment.



DEPENDENCY ON CHINA MORE OBVIOUS "IN THE STREETS"
-------------- --------------


10. (SBU) According to a recent report by Dr. Cho Myung-
chul of the Korea Institute for International Economic
Policy (KIEP),the PRC's expanding economic relationship
with the DPRK has not yet resulted in the North's
structural dependence on the Chinese economy. Nevertheless,
Cho's report emphasizes that North Korea's poorly developed
manufacturing industry puts it at a disadvantage in its
trade with the PRC. As a result, Chinese goods have become
major import items for the DPRK. Moreover, large volumes
of Chinese goods are entering the DPRK through Dandong and
have become popular on the DPRK black market. According to
media reports and Cho's in-depth interviews of North Korean
refugees, as much as 80 percent of consumer goods found in
the country's markets are Chinese products. The DPRK's
economy also depends heavily on China in other areas, such
as transportation and finance. In short, Cho's report
shows that DPRK economic dependence on the PRC is even more
evident at the "street level" than at the national level.


IMPLICATIONS FOR INTER-KOREAN COOPERATION
--------------


11. (SBU) In a March 17 meeting with poloff, Cho said the
ROK needed to begin preparing for China's growing economic
influence over the DPRK, as it would not only complicate
the ROK's plans for inter-Korean economic cooperation, but
also undermine South Korea's plans to reunify the Korean
peninsula under democratic and market-oriented principles.
ROKG officials routinely express concern about China's
increasing economic influence in the DPRK. These officials
say that China's increasing economic influence on the DPRK
will naturally lead to more Chinese political influence in
DPRK affairs. At worst, ROKG officials fear that the DPRK
could be incorporated into the PRC as a "fourth
northeastern province." Another scenario being
discussed in Seoul describes the North Korean elite
'running' to the PRC for help in the event of a DPRK
collapse, which will in turn provide the pretext for direct
PRC involvement in North Korean affairs.
VERSHBOW