PRC-DPRK BORDER: TRADERS DISCUSS CURRENCY REFORM

C O N F I D E N T I A L SECTION 01 OF 02 SHENYANG 000221

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 KN KS PGOV PINS PREL RS SOCI
SUBJECT: PRC-DPRK BORDER: TRADERS DISCUSS CURRENCY REFORM

REF: A. SHENYANG 170

B. SEOUL 1921

C. SEOUL 1956

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


1. (C) SUMMARY: Contacts in Northeast China along the PRC-
DPRK border say that North Korea's latest currency reform
will not have any short-term implications for social
stability. Sources agreed that this was a move by the DPRK
government to wrest back control of income streams from
those who had made money outside of legal channels over the
last decade. Markets remained closed as of December 9 and
while the victims of this reform were limited, the tiny
North Korean middle class was the biggest loser. END
SUMMARY.


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

CURRENCY REFORM: ELITES AND MOST PEOPLE KEEP WEALTH
-------------- --------------


3. (C) A Yanji-based Sino-Korean trader said that the DPRK's
latest currency reform targeted the emerging middle class
(Ref A) and others who earned their modest fortunes outside
of DPRK government-accepted channels, such as the informal
markets. While currency reform was deadly for this small
group, he said the policy affected neither the elites nor
the vast majority of people who were too poor to have
substantial amounts of currency to lose. One of
Heilongjiang Province's ten wealthiest businessmen, a
Mudanjiang Sino-Korean who proudly displays a picture of
himself next to Korean Workers' Party Secretary Kim
Ki-nam, said the impact of the revaluation on DPRK
elites, bureaucrats, and overseas business representatives
was non-existent because they all hold their wealth in
foreign currency.


4. (C) A Tumen-based Sino-Korean businessman said on
December 9 that a surprising, yet limited number of Chinese
traders were victims of this currency exchange, as some
occasionally received North Korean currency as temporary
barter chits while waiting for the real barter items to come
through. This businessman said that from his vantage point
on the Tumen River, the effect on the North Korean people
appeared minimal. Even though some people might be angry, he
didn't see any evidence of social unrest in North Korea (Ref
B outlines such concerns.)

MARKETS CLOSED DUE TO UNCERTAINTY, DPRK REACTING FLEXIBLY
-------------- --------------


5. (C) A Sino-Korean trader from Longjing who shuttles to
North Korea several times a week told us on December 9 that
as of December 8, markets in North Hamgyong Province were
still closed as traders were unwilling to unload product in
an atmosphere where there were no established prices. She
noted that prices were skyrocketing (Ref B). The president
of the Yanbian University of Science and Technology, Amcit
James Chinkyung Kim, subsequently said that the North
Hamgyong Workers' Party Deputy Secretary had visited him in
Yanji on December 11, telling him that each North Korean
household was simply given 500 New Korean won (NKW) outright
and then allowed to exchange up to 1,000 NKW (Ref C).
According to this source, the North Korean authorities
realized the need for some flexibility amidst the reality of
numbed traders and shuttered markets.


6. (C) A Yanji Sino-Korean pastor previously involved in
assisting DPRK refugees said he recently hosted a cousin
from the DPRK's South Pyongan Province for almost a month
(until early December). His cousin spent all his remaining
currency and re-entered North Korea at Dandong on December 8
only carrying consumer goods. The pastor said his cousin
had been trained by the authorities and ordered to ask his
Sino-Korean relatives for as much money and donations as
possible and before he was granted an exit visa and that
this training was mandatory. His cousin was initially
issued a two-month North Korean exit visa but upon exiting
at Sinuiju, the North Korean border officers reduced this to

SHENYANG 00000221 002 OF 002


one month.

REASONS FOR CURRENCY REFORM: LOCALS SPECULATE
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7. (C) Our Yanji-based trader said that it was rash to
speculate about the reasons for the reform, saying that
there could be many. He surmised that though this reform
would go over successfully in the short-term and not affect
social stability now, it could have long-term consequences
for the people since they could chalk this up to their
government appearing to be out of control. Our Mudanjiang
contact said that while it was clear that the DPRK
government wanted to reassert control of the economy and
redistribute resources - with the added political benefit of
penalizing those who profited from the informal economy -
the policy also fit North Korea's ongoing campaign to reach
the goal of being an economically strong nation by 2012.
Another contact, the Amcit director of the Tumen River
Vocational School, said he thought the currency exchange
might portend a DPRK move to interfere with existing foreign
investments or stave off potential calls for reform.

WICKMAN