PRC-DPRK BORDER: CURRENCY REFORM UPDATES

C O N F I D E N T I A L SECTION 01 OF 02 SHENYANG 000020

SIPDIS

E.O. 12958: DECL: TEN YEARS AFTER KOREAN UNIFICATION
TAGS: CH ECON EFIN EIND EMIN KN KS PGOV PREL
SUBJECT: PRC-DPRK BORDER: CURRENCY REFORM UPDATES

REF: SHENYANG 4

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


1. (C) SUMMARY. February meetings with DPRK border contacts
took the pulse of post-currency reform cross-border trade and
investment. Contacts doubted the accuracy of reported widespread
starvation and large-scale unrest. Urban-dwellers lost the
most during the revaluation. DPRK children rely on rice for
sustenance with little protein, and medical supplies are needed.
While foreign direct investment and trade suffered in December and
much of January, signs of pre-reform trade have begun to
return to the border. For DPRK leaders, the negative fallout
from the currency program was more widespread than reported
in the press. End Summary.

Everyone Suffers, Some More than Others
--------------


2. (C) During February 3-11 meetings with ConGenOffs, DPRK
border contacts in Shenyang, Dandong, and Yanbian noted that
the North Korean currency reform has had a negative
short-term effect on the distribution and supply of basic
goods and foodstuffs. However, they expressed doubt as to
whether this short-term event was accompanied by the
starvation and unrest reported by several South Korean and
Japanese media outlets in the few months since the reform was
initiated. At issue is who is suffering the ill effects.
According to Liu Chensheng, Board Director of Shenyang North
Korean Trade and Investment Consulting Company and member of
the Liaoning Entrepreneur Association North Korea Department,
rural residents suffered much less from reform than their
urban counterparts. Liu told ConGenOff that farmers only
receive official payment once a year, usually in December,
and this payment was made in the new currency. Urban workers
who already had money prior to reform, and who were receiving
regular paychecks, lost a considerable amount converting
their old currency to the new currency and bear the brunt of
various restrictions on trade.


3. (C) A contact in Ji'an, a Sino-Korean hospital director
who has made frequent personal and professional visits to
Pyongyang and Manpo, Ji'an's sister city across the border,
told ConGenOff that the outside world's fixation on "rice
aid" and other grain exports to North Korea has distorted the
reality of the poor nutrition situation. He recalled that
three of his relatively young DPRK uncles and aunts
(including one in Pyongyang) had suspiciously passed away in
the same year in the late 1990s and suspected that they had
died from starvation or one of several mass floods. In
recent years, his direct though limited experience suggested
many DPRK children had sufficient carbohydrates, even a full
bowl of rice to eat each day. However, their dietary deficit
of fats, oils, protein, and limited fruits and vegetables had
led to an overall decrease in their well being. He characterized
the typical meal for these children as a full bowl of rice and
a small, inadequate serving of pickled vegetables. A Dandong NGO
contact bristled that it was an oversimplification to reduce
the DPRK population to rice- and corn-poor hungry people. The
DPRK has many other more pressing needs, such as a dire shortage
of key medical supplies, he said.

A Return to Normalcy?
--------------


4. (SBU) Traders in Dandong and Yanbian told ConGenOff that
before the currency reform they were willing to accept small
amounts of North Korean won with the understanding that their
DPRK partners would eventually settle in RMB, euros, and/or
dollars. While not large sums at each go, the transactions
would accumulate and be settled in tradable currency.
However, the revaluation made settlement of these amounts
impossible and left them (along with their DPRK partners)
holding the bag.


5. (SBU) Liu Chensheng, who just returned from Dandong this
week, told PolEconChief that border trade has already picked
up (to a degree) in the last two weeks, and business is being
done with foreign currencies again. This is in contrast to
his December trip which saw a halt in cross-border activity.
North Korean counterparts remain fearful, though, that this
relaxation of the no forex policy could be reinstituted and
that once again trade volumes would fall. (NOTE: According to
Liu, the DPRK won exchange rate is back to pre-reform levels
due to continuous sharp depreciation. End Note) As a result
of the revaluation and the ensuing uncertainty, Liu said

SHENYANG 00000020 002 OF 002


foreign direct investment from such countries as China,
Thailand, and Malaysia had come to an almost complete
standstill. However, he fully expects investment flows to
recommence in March 2010. Liu plans to return to DPRK in
early March for meetings and to assess investment activities.

Fallout for the Leadership
--------------


6. (C) Liu, who previously characterized the currency reform
as, in part, an effort by Kim Jong-Il to help poorer people
who had no access to foreign exchange, also noted the
negative collateral effects surprised the DPRK leadership
(REFTEL). Liu said that Kim Jong-Il's heart had been in the
right place but that the implementation was awful. The third
son (Kim Jong-Un) definitely had a hand in the policy, but
the decision was not his alone. Several officials had lost
their jobs as a result of the currency reform, and not just
the Finance Minister, as reported in the press. Liu mentioned
to ConGenOff that the head of a major DPRK bank was among
those sacked, but did not detail which one.

WICKMAN