CHINESE INVESTMENT IN NORTH KOREA: VIEWS FROM THE

C O N F I D E N T I A L SECTION 01 OF 03 SHENYANG 000219

SIPDIS

DEPARTMENT FOR EAP/K, EAP/CM, INR
MOSCOW PASS TO VLADIVOSTOK

E.O. 12958: DECL: TEN YEARS AFTER KOREAN UNIFICATION
TAGS: CH ECON EFIN EIND EMIN ETRD KN KS PGOV PREL RS
SUBJECT: CHINESE INVESTMENT IN NORTH KOREA: VIEWS FROM THE
BORDER

REF: A. SHENYANG 167

B. SHENYANG 170

C. SHENYANG 92

D. SHENYANG 164

E. SEOUL 1866

F. SHENYANG 185

Classified By: Consul General Stephen B. Wickman. Reasons 1.4(b/d).


1. (C) SUMMARY: Chinese investment in North Korea appears to
be a largely state-directed affair, supporting government
objectives to engage in resource diplomacy. Chinese
businesses consider business in North Korea to be
unprofitable, are wary of entering the market, and will only
do so with Chinese governmental support or strong personal
ties. Legitimate DPRK investments in China are largely
limited to the service industry, but DPRK trade delegations
are more active today than in recent memory. Border trade
and tourism shutdowns in the winter are annual and regular
events. END SUMMARY.


2. (U) ConGenOff traveled to Dandong City in Liaoning
Province November 24-25 and Jilin Province's Yanbian Korean
Autonomous Prefecture and Mudanjiang City in Heilongjiang
Province December 6-15 to meet local contacts.

HOW THE CHINESE INVEST IN NORTH KOREA
--------------


3. (C) A Sino-Korean trader and native of Dandong told us
that there are two ways for Chinese entities to initiate
investment in North Korea. One was to contact the Chinese
Embassy in Pyongyang and work through the DPRK Trade
Ministry. The other was for Sino-Koreans to contact the
North Korean Veterans Committee's economic outreach section
or other unification-affiliated organization as overseas
Koreans or as individuals having personal or family
contacts. The DPRK side would collect the inquiry and
decide, in consultation with relevant organs, to assign an
appropriate investment project.


4. (C) To date, the safest and most successful investments
for Chinese are in minerals and the procurement of state
goods -- i.e., in the import-export trading companies that
bring in items desired by the North Korean elite. Risky as
they are, in the overall hierarchy of risky North Korean
investments, these were the best bets. Sino-Korean-run
business is almost exclusively trade-related with little
investment. Han Chinese businessmen, who now dominate the
Dandong channel, are equally dependant upon trade and avoid
investment. Our contact said the only major Chinese
investment in the DPRK is largely a state-to-state endeavor
or sometimes pursued by people with strong personal networks.


5. (C) Our contact said that the Sino-Korean Traders'
Association in Dandong had recently made a big breakthrough,
establishing in the last month an unprecedented and
ambitious joint-holding company with shares to invest in
North Korea -- each share pegged at RMB 500,000 (USD
73,200). To date, the holding company had gathered more
than ten shareholders. As the terms stood, the DPRK side
was offering a total guarantee on the maintenance of the
original capital investment, with no caveats. He said that
because each of the shareholders was a Sino-Korean trader
having a good reputation in the DPRK and China, the DPRK
side would find it near impossible to swindle the
shareholders because of potential fallout via negative
publicity. He was confident that this deal was the next
best thing to a guaranteed profit.

CHINESE GOVERNMENT: SUPPORTS RESOURCE DIPLOMACY
-------------- --


6. (C) A Sino-Korean trader in Yanji told us that his
company, which had long forsaken trade with North Korea due
to its unprofitability, was going to re-enter the market
with the support of the Chinese government. He said that
the Jilin Provincial Government had recently asked him to
look into re-opening the Sanhe-Hoeryong Warehouse that his
company held the option on, in anticipation of ramped-up
trade. He said the provincial capital told him it would

SHENYANG 00000219 002 OF 003


direct national-level resources to resurrecting this
project. The trader suspected that this renewed push was
spurred by the Chang-Ji-Tu project (Ref A) and also linked
to Wen Jiabao's October visit to Pyongyang. Most
importantly, it was part of a Chinese national-level goal to
engage in resource diplomacy with North Korea. As a result,
his company, which had given up on DPRK business for the
last five years, is now looking to North Korea.


7. (C) Our Dandong contact said that the Chinese government
was fully aware of and condoned unofficial (read: illegal)
trade interactions, business networks, and channels for
transferring capital (Ref B). However, he said the Chinese
authorities will refuse to advocate for any investors who
did not pre-register their business activities with the
appropriate local Chinese external economics and trade
bureau. A Longjing-based Sino-Korean trader who visits
North Korea several times per week repeated this rule,
saying she had once considered investing in the DPRK but
that rules stipulated that one had to go through the Chinese
Ministry of Finance and Commerce to register one's intent,
which she did not want to do.


8. (C) Echoing our Yanji contact's views on the importance
of minerals, our Dandong contact said one of the most
frequent trade and barter items handed over by the North
Koreans is minerals. To guarantee the maintenance of
investment capital, DPRK organizations simply compensate the
Chinese side with minerals rather than RMB or hard
currency. Coal is said to be the prime target for Chinese
traders, even though our contact said North Korea's total
proven reserves were only about 4 billion tons, sufficient
only to the entire Chinese economy for a little over a
year. Other strategic rare earth metals are also bartered
this way, but our contact said coal and iron seem to hold
little future.


9. (C) The North Korean authorities seem apprehensive about
the amounts of minerals flowing out to China, and our
contact said that the DPRK has issued a notice prohibiting
the free, unregulated export of coal, which is most
frequently used in trade and barter deals. As a result, he
said it appears that the outflow has been reduced. The flow
of other strategic rare earth metals seems unchanged,
according to our contact.

CHINESE RELUCTANCE TO INVEST IN NORTH KOREA
--------------


10. (C) One of Heilongjiang Province's ten wealthiest
businessmen, a Sino-Korean trader from Mudanjiang, said that
DPRK officials continually visit him in Mudanjiang to ask
for investment. Like the Yanji-based trader above and
numerous other businessmen in Northeast China, however, this
businessman sees investing in the DPRK as unprofitable and
refuses to do so (Ref C). He would rather just stay
"friends," so he restricts his "investments" to "donations"
of money and equipment to the North Korean people, and
prominently displays a picture of him with Korean Workers'
Party Secretary Kim Ki-nam, whom he calls his "friend." He
says that in the past, USD 500 put into a bureaucrat's
pocket would make that person a "friend for life."


11. (C) A Sino-Korean businessman in Tumen had a similar
story about buying gratitude with greenbacks. He recounted
that about ten years earlier, returning from visiting
relatives in North Korea on a train, he met a young man whom
he pegged to be a member of the elite. After befriending
the young man, our contact ended up sending USD 10,000 to
aid a village project that the young man was promoting.
Soon thereafter, the young man repaid him and subsequently
looked him up again a few years later after having achieved
a high position in the DPRK bureaucracy. A Tianjin-based
Sino-Korean trader running mines in North Korea says his
reasons for investing in North Korea are simple. He is
"looking towards the future" but is actually investing "out
of sympathy for the North Korean people." He called his
current operation a "money pit" and joined all of our
contacts in agreeing that without Chinese government
support, business in North Korea was unpredictable,
unreliable, and generally difficult to the point of

SHENYANG 00000219 003 OF 003


discouraging business.

DPRK: LOOKING FOR CHINESE FOREIGN DIRECT INVESTMENT
-------------- --------------


12. (C) Our Dandong contact was only aware of two DPRK
investments in Dandong over the last 10 years. Two food
processing plants, producing kimchi, have been in various
states of disrepair and were not particularly profitable.
He said that in China, the DPRK seemed to be more interested
in trade than in investment, even though many cities
throughout Northeast China sport joint-venture restaurants,
hotels, and the occasional factory.


13. (C) Our contact said there seemed to be more North
Korean delegations and representatives in Northeast China
drumming up trade and investment than in his recent memory.
He told us that two very large North Korean trade
delegations had visited Dandong this year with the dual
goals of promoting trade and attracting foreign direct
investment (FDI). He said the FDI component was a notable
change from the past (Refs D and E give further evidence of
this change.)


14. (C) Yanbian University FAO Director, Sino-Korean Liu
Mingzhu, said that as a result of the successful Tumen River
Development Conference in August (Ref F),Yanbian University
was hosting some North Korean Academy of Social Sciences
(NKASS) researchers working on a plan to further develop
additional port berths at Rason. These are in addition to
and separate from the Wen Jiabao deals to lease Piers 3 and
4 at Rason. Yanbian University's Dean of the Agricultural
College, Sino-Korean Yan Changguo, said that his school
enjoys good relations with several North Korean institutions
but that the North Koreans are relentless in their requests
for financial assistance.


15. (C) (NOTE: ConGenOff noticed an unusually visible DPRK
presence in Yanbian on this latest visit, unexpectedly
running into three separate North Korean parties at
different restaurants. One was a North Hamgyong Province
Saetbyol County trade delegation that our Longjing contact
identified and had met with earlier in the day on December

9. On the other two parties, ConGenOff could not tell
exactly where they were from, but suspect that one group of
two, flanked by Han Chinese professors, were from NKASS.
All seemed to be spending a decent amount of money and
moving about very visibly. A Yanbian University junior
lecturer said many North Korean students studied at his
institution and that even more who were dependants of North
Koreans on official duty in China were studying at local
middle and high schools. The students on campus met
regularly on Saturday mornings for political education and
generally stayed away from other students. This
conversation took place before reports surfaced of a DPRK
recall of citizens working or studying in China but suggests
that such a recall, if confirmed, would be extremely
difficult. END NOTE.)

BORDER SHUTDOWNS IN WINTER: REGULAR AND EXPECTED
-------------- ---


16. (C) January is a blank spot in the PRC-DPRK trade
calendar as it is the period, in theory, when the North
Koreans stop all formal border trade for at least three
weeks to rebalance their books and assess the status of
their planned economy before the lunar New Year. In
practice, the period represents a time of mutual desperation
on both sides of the border for buyers and sellers alike,
for those aiming to unload stale product and also for those
trying to take advantage of spiking prices. Our Dandong
contact said that for a bribe of USD 500-600 per truckload,
the North Koreans would open up the bridge at night during
this shutdown period and wave in a shipment or two and
release some goods as well. This annual winter shutdown is
a prominent event in the trading almanac and one that plays
a central role in planning inventory and managing
stockpiles.

WICKMAN