PRC-DPRK: CHINA'S COMPLIANCE WITH UNSCR 1718

C O N F I D E N T I A L SECTION 01 OF 03 SHENYANG 000189

SIPDIS

DEPARTMENT FOR EAP/K, INR, EAP/CM, IO

E.O. 12958: DECL: TEN YEARS AFTER KOREAN UNIFICATION
TAGS: PREL PGOV PINR ETRD KN KS CH
SUBJECT: PRC-DPRK: CHINA'S COMPLIANCE WITH UNSCR 1718
LUXURY-GOODS PROVISIONS

REF: A. (A) 07 SHENYANG 108

B. (B) 07 SHENYANG 69

C. (C) 06 SHENYANG 1201

D. (D) SHENYANG 109

E. (E) SHENYANG 67

F. (F) SHENYANG 185

Classified By: ACTING CONSUL GENERAL BRIAN M. GIBEL.
REASONS: 1.4(b)/(d).


1. (C) SUMMARY: Two years on, PRC compliance with the
spirit of UN Security Council Resolution 1718's luxury-
goods provisions appears limited at best. Dandong and
other border officials tell us privately that while they
are implementing military-related provisions of UNSCR 1718,
they are not enforcing a luxury-goods ban on North Korea
because Beijing has not defined--or has chosen not to
define--"luxury goods." U.S.-defined luxury items like
foreign liquor, consumer electronics and high-end vehicles
are easily shipped across the PRC-DPRK border. More
generally, certain export-controlled items can be finessed
across the border by enterprising individuals with the
right connections, whether by way of smuggling, bribery,
mislabeled manifests or other "informal" means. Chinese
scrutiny of outbound goods continues to be minimal. By
contrast, PRC restrictions on grain exports and certain
renminbi-denominated banking transactions with North Korea
continue to be more stringently enforced, though their
practical impact ought not be overstated. END SUMMARY.


2. (C) This cable was coordinated with Embassy Beijing.


3. (C) This report draws on private discussions with
northeastern Chinese North Korea experts,
trade/customs/port officials, businessmen and cross-border
shippers in the two years since the passage of UNSCR 1718
in October 2006. It also draws on extensive site visits
during the same period to the PRC-DPRK borderlands,
including, most recently, to Dandong (December 29) and
Jilin Province's Yanbian Korean Autonomous Prefecture
(December 15-18).

PRC UNSCR 1718 ENFORCEMENT: THE PARTY LINE VS. REALITY
-------------- --------------


4. (C) In official meetings since October 2006, a
succession of northeastern Chinese political and trade
officials claimed to be "strictly enforcing" UNSCR 1718,
though they refused to disclose any details. Liaoning and
Jilin authorities have denied all of Post's formal requests
to discuss enforcement of UNSCR 1718 in the PRC-DPRK border
region.


5. (C) Some officials have proven more forthcoming
privately. YANG Wenjia (PROTECT),Chief of the Foreign
Trade Administration Section of the Foreign Trade and
Economic Cooperation Bureau in the strategic PRC-DPRK trade
thoroughfare of Dandong, told us informally December 29
that the PRC maintains "strict" DPRK-specific export
controls on arms, drugs and WMD precursors. Yang said he
was aware of UNSCR 1718's luxury-goods provisions (as well
as U.S.-defined luxury items),but explained that Dandong
is not enforcing a luxury-goods ban on North Korea because
Beijing has not defined "luxury goods." By this logic,
asserted Yang, cross-border trade in Dandong has not been
subject to UNSCR 1718 luxury-goods prohibitions. This is
why Yang and other border officials claim UNSCR 1718 has
had minimal impact on PRC-DPRK trade levels since 2006
(see, for instance, ref A).


6. (C) Officials in Jilin Province--which, like Liaoning,
also shares a long trading frontier with North Korea--
offered similar private explanations. Well-placed
officials in Yanji and Tumen told us last year that Beijing
had not introduced new restrictions at PRC-DPRK ports in
the province for the purpose of enforcing UNSCR 1718 (ref
B). Awareness of UNSCR 1718's luxury-goods provisions also
seems to be poor in certain remote PRC-DPRK border areas.
During a private dinner in Changbai last year, for
instance, a senior administrator at the PRC land port
opposite the DPRK's Hyesan expressed surprise that the U.S.
had formulated a list of prohibited luxury goods (ref A).


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7. (C) PRC-DPRK business contacts continue to report that
North Koreans have little difficulty in procuring (U.S.-
defined) luxury goods in northeast China. LIU Chensheng
(PROTECT),a Shenyang-based businessman who regularly hosts
official North Korean delegations in northeast China, told
us in late 2006 that many of his North Korean guests here
were able to purchase and easily ship home laptops,
clothing and MP3 players (ref C). The same holds true
today, Liu tells us in late 2008. In Dandong on December
29, ZHANG Zhaoliang (PROTECT),General Manager of the PRC-
DPRK trade/shipping consultancy Tiger Eye, related that
(U.S.-prohibited) items like MP3/DVD players and top-shelf
foreign liquor can be shipped into North Korea via Dandong
with ease. The same appears to hold true for luxury
vehicles, also proscribed by the U.S., European Union and
others pursuant to UNSCR 1718. During a visit to the
bustling Dandong Land Port on the morning of December 29,
Poloff and Pol/Econ Chief at approximately 1130 observed a
late-model Lexus SUV with no license plates idling in the
bonded warehouse within the port enclosure; the vehicle
appeared to be readying to queue to cross into Sinuiju. A
few meters away behind the warehouse (but within the port
enclosure) two men hurriedly poured gasoline into the tank
of a used Mercedes Benz sedan, parked next to another late-
model Lexus SUV--both without license plates and apparently
imminently bound for Sinuiju.


8. (C) Extensive site visits to most PRC-DPRK border ports
since October 2006 reveal only minimal PRC scrutiny of
inbound and outbound goods, particularly at the Dandong
Land Port, through which over half of all official PRC-DPRK
trade flows. Last year, Dandong-based shippers claimed to
be experiencing no major slowdowns
stemming from reported PRC enforcement of UNSCR 1718.
Tiger Eye's Zhang Zhaoliang reports the same holds true in
late 2008. Zhang noted that he and his contract shipping
partners are able to clear DPRK-bound land, rail and sea
shipments through customs, as well as commodity-inspections
and quarantine (CIQ),in one day. At the Dandong Land Port
on December 29, Poloff between 1000 and 1050 observed PRC
port officials briefly peer into the holds of most (and the
cabs of some) incoming DPRK container trucks; between 1055
and 1130, Sinuiju-bound PRC trucks--many of whose
containers had been pre-cleared and sealed before arriving-
-received little or no scrutiny. We have found inspections
in the smaller, lower-volume land ports of Jilin Province
to be even less rigorous.


9. (C) Post is unable to offer a firsthand assessment of
PRC scrutiny of goods shipped via PRC-DPRK commercial air,
sea and rail ports. The Dandong Foreign Trade Bureau's
Yang Wenjia noted that the majority of PRC-DPRK trade
transiting Dandong this year continues to ship via truck,
in part because of small shipment volumes and new PRC
restrictions on railcars entering North Korea (see ref D).
Tiger Eye's Zhang Zhaoliang noted that PRC inspections of
his rail and sea shipments are minimal, usually take place
at a bonded warehouse and involve customs agents quickly
glancing at the loaded shipment and the CIQ manifest.
Zhang suggested scrutiny is more lax for maritime shipments
(he loads his DPRK-bound maritime cargo directly onto
Nampo-based North Korean ships docking at Dalian Port each
week). Farther north in Jilin Province's Yanbian
Prefecture, Western contacts recently shipping goods to
Rajin-Sonbong via China's busy Quanhe Land Port reported
minimal PRC inspections there, too.


10. (C) Regulations notwithstanding, most PRC goods--luxury
or otherwise--are shippable across the PRC-DPRK border by
any enterprising individual with the right connections,
whether by way of smuggling, mislabeling manifests or other
"informal" means. Post over the past two years has
documented ongoing cross-border smuggling in the Dandong
area; much is small-scale, though some is larger in volume
and involves the North Korean military. Tiger Eye's Zhang
Zhaoliang noted that while the PRC strongly controls the
export of prohibited items like arms and drugs, less-
sensitive "problematic" items (e.g., certain types of
tobacco) can be finessed across the border. Zhang
typically provides prospective manifests to friends in
Dandong/Dalian Customs and CIQ on an informal basis; he can
then make alternative arrangements for problematic items he
is tipped off to in advance. Alternative procedures, Zhang

SHENYANG 00000189 003 OF 003


said, include smuggling; bribing port officials;
mislabeling manifests (possible because of lax
inspections); and tucking problematic items into separate
shipments. These "alternative" measures, however, can
increase client costs by up to 100 percent, Zhao explained.



11. (C) On U.S.-defined luxury goods like liquor, Zhang
noted that much of the foreign alcohol entering North Korea
of late is low-quality/counterfeit. Real luxury foreign
liquor--affordable only by "senior elites"--is being
procured by "large" North Korean trading firms, often using
PRC partners to affix fake labels in order to ease customs
duties, he explained. More generally, Zhang underscored
that PRC export controls on a given item can usually be
skirted; from a Chinese shipper's perspective, much more
difficult is securing the necessary permits from the North
Korean side, he said.

PRC LUXURY-GOODS ENFORCEMENT IN PERSPECTIVE
--------------


12. (C) The PRC's grain-export restrictions this year offer
a useful counterpoint to its enforcement of UNSCR 1718's
luxury-goods provisions. Unlike with luxury goods, the
2008 PRC's grain-export restrictions have been clear,
publicized and more stringently enforced, according to
contacts (see, for instance, ref E). Among others,
Yanbian-based NGO contacts with food-aid operations across
the border have been especially hard hit (see, for
instance, ref F). The Dandong Foreign Trade Bureau's Yang
Wenjia noted December 29 that he had not received any
indication from provincial authorities that any loosening
on this front is in the offing for 2009. Nevertheless,
grain smuggling continues, though the scope is unclear.
Tiger Eye's Zhang Zhaoliang, for instance, claimed
smuggling up to "several hundred tons" of grain into North
Korea is possible if shipped by sea and folded into a
large, otherwise legitimate shipment.


13. (C) Another counterpoint: PRC restrictions on
remittances and other renminbi-denominated financial
transactions with North Korea also remain in place,
according to PRC-DPRK business contacts in Liaoning and
Jilin provinces. Despite new Chinese regulations
sanctioning the use of the RMB for PRC-DPRK trade
settlement, Chinese banks are still not authorized to
process PRC-DPRK trade transactions. Consequently, Chinese
businessmen/traders and their cross-border contacts
continue to use U.S. dollars and Euros--often in cash--to
settle their transactions because Chinese banks will not
process the transactions, said trade facilitator Liu
Chensheng in Shenyang on December 11; ZHU Yilong (PROTECT),
the Tumen-based General Manager of the Yanbian Haihua
Import and Export Company, a major cross-border player in
Jilin, on December 16; and Dandong trade official Yang
Wenjia on December 29. Contacts at Bank of China's
Shenyang headquarters told our Pol FSN December 29 that the
DPRK-specific restrictions remain in place for Bank of
China branches nationwide. Most PRC-DPRK trade
transactions, however, are not handled in banking channels,
so the practical import here ought not be overstated.
GIBEL