NEW DEVELOPMENTS IN PRC-DPRK BORDER TRADE

C O N F I D E N T I A L SECTION 01 OF 02 SHENYANG 000037

SIPDIS

SIPDIS

DEPARTMENT FOR EAP/CM, EAP/K

E.O. 12958: DECL: TEN YEARS AFTER KOREAN UNIFICATION
TAGS: PREL PINR PGOV ECON ETRD PREF KN KS CH
SUBJECT: NEW DEVELOPMENTS IN PRC-DPRK BORDER TRADE

REF: A. (A) SHENYANG 30


B. (B) SHENYANG 14

Classified By: CONSUL GENERAL STEPHEN B. WICKMAN. REASONS:
1.4(b)/(d).


1. (C) SUMMARY: New PRC export restrictions are
complicating some PRC-DPRK trade and contractual
relationships, according to more Chinese trade officials.
North Korean businessmen have been sent abroad recently on
grain "purchasing" missions, essentially requesting free
"donations" in places like Thailand. PRC borderland
provinces recently enacted new measures aimed at capturing
PRC-DPRK border trade transactions within the Chinese
banking system, but the impact of the new rules remains
unclear. Chinese Korea specialists remain concerned about
North Korea's food supply this year. North Korean demand
for more sophisticated Chinese electronics is growing, say
Chinese trade officials. END SUMMARY.

PRC EXPORT STRICTURES RESHAPING PRC-DPRK TRADE
-------------- -

2. (C) New PRC export restrictions (ref B) appear to be
reshaping some PRC-DPRK trade and contractual
relationships, according to Chinese trade officials.
(These comments echo sentiments shared by other trade
officials noted in ref A.) Queried on how trade between
Liaoning Province--home of Dandong, conduit for the
majority of official PRC-DPRK bilateral trade--and
neighboring North Korea is faring, provincial trade
officials in Shenyang acknowledged stresses on DPRK-bound
agricultural shipments. However, the trade officials were
quick to emphasize that the Chinese measures apply equally
to all countries and do not specifically target North
Korea. SUN Su (STRICTLY PROTECT),Deputy Director of the
Liaoning Provincial Foreign Trade and Economic Cooperation
Bureau's Foreign Trade Promotion Division, told visiting
INR/GGI analyst Mark Phelan on March 12 that the new export
restrictions raise problems for some Chinese firms in
carrying out existing contracts with North Korean partners.
But Sun claimed no "special" exception or exemption would
be made for DPRK-bound shipments. (NOTE: Other trade
officials told us privately in recent weeks that, concerned
about border stability, Dandong and Liaoning officials are
internally lobbying Beijing for an exemption for non-aid
PRC-DPRK trade (ref A). END NOTE.)


3. (C) Some North Korean businessmen have been sent abroad
recently on grain "purchasing" missions in Southeast Asia,
according to a Chinese DPRK specialist with North Korean
contacts. The specialist told Poloff that two destinations
are Thailand and Vietnam, where the North Koreans are
essentially requesting free "donations" from private
producers (e.g., of rice) in a bid to supplement domestic
supply, which he said has been constrained in part by
China's new agricultural export regulations.


4. (SBU) In China, meanwhile, several local reports
recently indicated large surges in DPRK-bound grain exports
at several key points along the PRC-DPRK border in
January/February as shippers rushed to fill orders before
their export permits expired. In southern Jilin Province,
for instance, the border city of Ji'an--opposite Manpo--
announced a 67 percent increase in corn exports to the DPRK
in January/February 2008 compared to the same period last
year. The dominant shipper, according to an online report
posted by the Ji'an government, was an out-of-province firm
from Dandong rushing to ship before its export permit--and
its entitlement to tax rebates--expired at the end of the
month. Farther north in the Yanbian Korean Autonomous
Prefecture's Hunchun--home to the PRC land port closest to
the DPRK's Rajin/Rason--one of several contradictory local
press reports suggested a similarly-sized uptick in rice
exports to the DPRK in January 2008 compared to the same
period last year.

PRC OFFICIALS ON MORE NEW PRC-DPRK TRADE REGS
--------------

5. (SBU) Liaoning and Jilin provinces in late February
announced new regulations aimed at standardizing the

SHENYANG 00000037 002 OF 002


settlement of PRC-DPRK border trade. The impact of the new
measures, touted in the northeastern Chinese press, remains
unclear. Sun Su, the Liaoning trade official, explained
the new rules permit traders to use PRC trade banks to
process payment and settle accounts through a variety of
methods. Although press reports claim the new measures
will decrease transaction costs and minimize credit risk,
Sun intimated that the purpose was more regulatory in
nature: to capture border trade transactions within the
banking system. In the past, Sun noted, payment was
usually handled outside banking channels--informally and
often in cash.


6. (C) Queried whether the new regulations would make
border trade more difficult or cumbersome in the short
term, Sun claimed only that the measures were "welcomed" by
both sides and would promote the "healthy development" of
PRC-DPRK trade. He contended, however, that barter trade,
already "very small" in value, might decrease because of
the monetization of trade. (NOTE: We find it unlikely that
the new measures, at least in the near term, will play a
major role in suddenly "standardizing" PRC-DPRK trade.
While the new measures theoretically offer potential
benefits, some mentioned above, the challenges are many.
To name just one: a fair amount of border trade, especially
farther north along the border, is small-volume and most
easily conducted in cash without the cumbersome, time-
consuming and perhaps profit-infringing resort to banking
channels. We also have yet to hear of an enforcement
mechanism that will ensure most transactions occur,
especially those of highest value, within the banking
system. END NOTE.)

PRC-DPRK TRADE IN 2008
--------------

7. (C) Northeastern Chinese Korea experts remain concerned
about North Korea's food supply this year, but when probed
about recent PRC agricultural export restrictions, some
suggest Chinese sympathy is not universal. One government
scholar, for instance, cautioned that the DPRK in recent
years imposed its own set of restrictions on exports (e.g.,
lumber, iron ore) of great interest to the PRC. For their
part, Liaoning trade officials on March 12 actively skirted
questions about what percentage agricultural products
currently comprise of Liaoning's exports to the DPRK. CHEN
Deping (STRICTLY PROTECT),Director of the Liaoning
Provincial Foreign Trade and Economic Cooperation Bureau's
Foreign Trade Promotion Division, offered only that there
was no major change in Liaoning's grain exports--primarily
rice and corn--to the DPRK in 2007. He contended that
"most important" to North Korea were Chinese exports of
machinery and oil.


8. (C) On PRC-DPRK trade more broadly, Chen's deputy, Sun
Su, noted that two-way PRC-DPRK trade in 2007 reached USD
1.98 billion, approximately 70 percent of which transited
Dandong. Despite the increase over 2006 (when two-way
trade was roughly USD 1.7 billion),PRC-DPRK trade growth
lagged behind China's overall external trade growth of
roughly twenty percent, according to Sun. Asked to comment
on ongoing and future trends, Chen claimed some limited
economic improvement in the DPRK has spurred North Korean
demand for more sophisticated Chinese electronics (e.g.,
USB drives, MP3 players, LCD televisions). He projected--
without reference to United Nations Security Council
Resolution 1718--that these products would fare well at
Pyongyang's major trade expositions in May and September
this year.

WICKMAN