WAITING AND WATCHING: NORTH KOREA AFTER CURRENCY

SE C R E T SECTION 01 OF 02 XXXXXXXXXXXX 000004

NOFORN

SIPDIS

DEPARTMENT FOR EAP/K, EAP/CM, INR

E.O. 12958: DECL: TEN YEARS AFTER KOREAN UNIFICATION
TAGS: CH ECON EFIN EIND EMIN KN KS PGOV PREL
SUBJECT: WAITING AND WATCHING: NORTH KOREA AFTER CURRENCY

REFORM

REF: 09 XXXXXXXXXXXX 167

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


1. (S/NF) SUMMARY: On December 15, EAP DAS XXXXXXXXXXXX and XXXXXXXXXXXX staff met with XXXXXXXXXXXX, a major player
here in Chinese-North Korean economic exchanges. XXXXXXXXXXXX
attributed the DPRK,s recent currency reform to several
factors: controlling rampant inflation, preventing 'hot
money' flows, leveling the wealth gap between workers and
traders, controlling domestic currency, and most importantly,
uncovering potential political opposition. As a result of the
reform, commerce has come to a halt. The leadership, as part
of an ambitious 2012 development strategy, hopes for the
restoration of relations with the United States. XXXXXXXXXXXX also
believes that current plans assume Kim Jong-il will be around
for some time and that Kim Jong-un will be his successor. The
recent recall of DPRK scholars, students and scientists from
China following the defection of a North Korean exchange
student, for example, suggests increasing levels of paranoia.
END SUMMARY.

GIVE ME GOOD REASON
--------------


2. (S/NF) On December 15, EAP DAS David Shear and Consulate
Shenyang staff met with XXXXXXXXXXXX, XXXXXXXXXXXX visits
Pyongyang frequently. Admitting he is unsure of the exact
value of Chinese investment into North Korea, XXXXXXXXXXXX believes
the number to be many billions of renminbi. Chinese
companies, like their ROK counterparts, use North Korea as a
processing zone, primarily in the mining and seafood
industries. According to XXXXXXXXXXXX, the DPRK leadership's 2012
target for achieving 'strong-country' status should form the
principal basis for analyzing recent political developments,
including the currency reform measure.


3. (S/NF) The most important reason for the recent DPRK currency
reform, according to XXXXXXXXXXXX, is to uncover political opposition,
particularly against Kim Jong-il's younger son. Controlling
inflation, leveling the wealth gap, controlling domestic
currency and access to foreign currency, are all part of this
strategy. XXXXXXXXXXXX believes that the third son, Kim Jong-un,
favored the currency revaluation, and that going forward Kim
Jong-un leans toward a Vietnamese-style of economic reform.
Opposition to the currency exchange, according to XXXXXXXXXXXX, might
reveal who opposes the ascension of Kim Jong-un to
leadership. According to XXXXXXXXXXXX, Kim Jong-il's support of the
currency reform points to his favoring the third son; those
opposing the revaluation, also oppose the third son. XXXXXXXXXXXX drew
parallels to the 2009 nuclear tests, which he said were
also influenced by succession plans. XXXXXXXXXXXX said that the first
son, Kim Jong-nam, opposes his younger brother's reform
plans and favors a Chinese-style of economic opening.


4. (S/NF) XXXXXXXXXXXX said that the number of factions competing for Kim
Jong-il's attention have made it increasingly difficult for
Kim Jong-il to listen to anyone. As a sign of Kim Jong-il's
paranoia, he recently recalled all students, scholars, and
scientists in China following the defection of an exchange
student in Northeast China. He did this despite the need for
Chinese knowledge, production skills, and technology to
achieve the country's goals for 2012. However, XXXXXXXXXXXX believes
that current instability will settle and the government will
move ahead with reform, fully expecting Kim Jong-il to be
around for sometime to come. The reform, according to XXXXXXXXXXXX, may
not be toward a more open economy. Rather, with currency
reform giving the regime the ability to control domestic
currency, reforms will lead to tighter control over the
economy.


5. (S) Prior to revaluation, one dollar equaled 3500 won. To
put that in perspective, the average worker in Pyongyang
earns 3000-4000 won per month. XXXXXXXXXXXX reported that according to
the DPRK Embassy, the official exchange rate following reform
is now one dollar equals 129 won. For the common person,

SHENYANG 00000004 002 OF 002


besides suffering from a significant cut in won-based
savings, supermarkets and department stores that deal in won
have suspended activity as they wait to see what impact
currency reform will have on commodity prices. Thus, it has
become difficult to purchase day-to-day needs. XXXXXXXXXXXX pointed
out, if commodity prices rise, the economy will be ruined.
However, if prices settle as a result of reform, and assuming
constant wages, the economy will be okay as workers once
earning one dollar a month will now earn nearly 20 dollars.


6. (S) Traders, who earn many times more than the average
wage-earner, have been unaffected by the reform in monetary
terms, as savings are held mostly in euro and dollars. Since
the revaluation, only stores dealing with foreign exchange
have been open and prices in these stores have increased
400-500 percent. For example, a TV that cost RMB 4000 now
costs RMB 20,000. Many of these stores raised prices in
anticipation of the reform, with the expectation that prices
would then fall. However, prices have not fallen. Many of the
stores that raised prices prior to reform have since been
closed by the government, their goods confiscated. Thus, even
traders who have not lost money from revaluation now have
nothing to buy. Chinese traders along the North Korean border
have also been affected by currency reform even though most
trade is done in euros and dollars. As is the case within
North Korea, people are waiting and watching to see what will
happen to prices. In the meantime, nobody wants to sell
anything.

NOT A CRISIS YET BUT CLOSE
--------------


7. (S/NF) XXXXXXXXXXXX does not believe the DPRK is in crisis mode at this
time. As he said, the people are used to this sort of thing.
He saw the currency reform as being part of a broader
conflict within the government as it moves forward in the
next several years. Since 2002, the DPRK has allowed some
economic reform, without expressing strong support or
opposition. As he put it, the government has been waiting and
watching to see what would happen.

CHINA, the U.S., and EVERYTHING
--------------


8. (S/NF) XXXXXXXXXXXX said many in the DPRK believe the Chinese do not
understand their country. While neither the Chinese nor the
DPRK are likely to criticize the other in public, XXXXXXXXXXXX said
that in private the DPRK has disparaged the Chinese for not
including North Korea on its list of 147 tourist destinations
or 137 investment destinations. These omissions and the
disparate Chinese actions on regional development projects
clearly indicate that North Korea is not a priority for the
Chinese. For instance, while China recently elevated the
long-beleaguered Changchun-Jilin-Tumen River development plan
to a national level project, the DPRK left the Tumen River
Development Plan, as it sees no benefit (REFTEL). Relations
between the two countries were getting so bad, in fact,
Premier Wen Jiabao visited Pyongyang two months ahead of
schedule.


9. (S/NF) According to XXXXXXXXXXXX, North Korea has set an ambitious
target of developing a strong country by 2012. As part of
this project, it is planning to build 100,000 residential
apartments in Pyongyang by 2012. In order to encourage
Chinese investment, the DPRK is offering Chinese investors
mining and ocean rights for their injection of cash into the
project. A former Consul General of the North Korean
consulate in Shenyang, recently spent two weeks in Beijing
attracting about RMB 12 billion for this project and planned
to come to Shenyang following his time in Beijing.


10. (S) Restoration of relations with the United States is
another important part of the DPRK's reform plans. He said,
however, that North Korea looks forward to an ongoing cycle
of ups and downs in negotiations and that it counts on the
U.N. to be slow in implementing sanctions. As he said, he
believes that once things settle down, North Korea will show
China and the U.S. "its bottom card."

WICKMAN