August 30, 2016 1:00 pm JST

Deciphering North Korea's tangled economic ties with China

ATSUSHI IJUIN

Chinese characters have been removed from North Korean road signs near the border with China.

Even as its international isolation deepens, North Korea has been able to rely on China to provide an economic lifeline: Its longtime ally accounts for 80% of the North's trade.

Yet the situation is a complicated one, and a recent visit to the country yielded conflicting signs as to whether the economic relationship between the two is improving or deteriorating.

Lack of characters

In early August, I entered Rason, a special economic zone in the northeast of the country. It is accessible by road from the Chinese city of Hunchun, in the Yanbian Korean Autonomous Prefecture of Jilin Province. Cross a bridge over the border and go through immigration, and you are in the reclusive country.

After looking around the border area, we took a bus along a nearly 50km road -- built by China -- leading to downtown Rason. Vehicles from China can enter the city freely if they are preregistered, and we saw numerous Chinese trucks, buses and passenger cars traveling in and out of Rason. Even the tighter sanctions the U.N. slapped on Pyongyang in March has not halted the flow of Chinese tourists. On the day of my visit, 370 tourists came to the city, according to local officials.

But there was a small yet remarkable change since I visited last year. Road signs leading from the border toward the city used to be written not only in Hangul but also in English and Chinese, as the city was keen to attract foreign business. This time, the Chinese was missing, and a close look at the signs showed that the white characters had been scraped off. The change, I later found out, had come late last year.

There were changes on China's side of the border, too, with half-finished electricity transmission towers lining the road. The towers are part of an economic cooperation project intended to supply electricity from Chinese power stations to North Korea, which suffers from chronic shortages. But according to a Rason official, work on the Chinese side has been suspended since April.

Local authorities would not discuss why the road signs were changed, or why the power transmission work had stopped, so the exact reasons remain unclear. But rumors in Rason had it that the road signs were scrubbed of their Chinese characters soon after Moranbong Band, a North Korean all-female pop group formed by leader Kim Jong Un, abruptly cancelled a concert in Beijing last December. The transmission tower project, the rumors said, stalled because of the U.N. sanctions.

I was equally surprised to hear from a local businessman that Chinese banks, which used to have a large presence in Rason, have been steadily disappearing from the city. The doors of Tumangang Bank, for instance, were tightly shut and its sign had been stripped of its Chinese characters, just like the road signs.

Chinese banks facilitate vital cross-border remittances, and it seems inexplicable that North Korea would want to push them out, given how desperate the country is for foreign currencies. A branch of Golden Triangle Bank, a domestic bank, was promoting foreign currency time deposits while I was there.

What, then, is driving the exodus of Chinese banks? Interviews with local officials, businessmen and experts provided some clues to this and other mysteries.

Bright spots

A stroll along the border area showed that not every aspect of the economic relationship is going south. Since summer -- a few months after the latest U.N. sanctions against North Korea took effect -- some aspects have even been looking up.

Some 70% of the goods traded between North Korea and China pass through Dandong, a border city in the northeastern Chinese province of Liaoning. The city was so crowded with tourists from China that I was unable to stay in the hotels I wanted to during my visit. 

These visitors were flocking to newly opened shops and restaurants in the tourist district of Sinuiju, a North Korean city situated just across the Yalu Jiang river. The district was developed jointly by travel companies in North Korea and China, and so far, only Chinese are allowed in. No visa is required, and visitors can either cross the bridge, visit just the tourist district and return, or take a one-day bus tour that covers the tourist district as well as the rest of the city. This summer, each option attracted some 500 people a day, and Dandong saw a steady stream of tour buses leaving in the morning and returning in the evening.

Ebbs and flows

Why have some joint projects moved forward while others have languished? Of course, the economic relationship between North Korea and China is affected by international developments like the U.N. sanctions and by the state of overall bilateral ties. But a professor at a university in Dandong points to a third factor: "The domestic politics of each country also play a big role."

According to this professor, who spoke on condition of anonymity, many of the joint projects that have been suspended since Kim Jong Un came to power were initiated by Jang Song Thaek, Kim's late uncle. Jang was widely seen as the regime's No. 2 figure before he was executed by the supreme leader.

One example is the plan to jointly develop the Hwanggumpyong Island on the Yalu Jiang river. Although the building to be used for the project's joint management body is almost complete, the project itself has been put on hold. The gate to the site on the Chinese side was closed when I visited, as was the road leading up to the development site.

Domestic politics may also explain the disappearing banks in Rason.

While the real reason behind their withdrawal remains a mystery, a Rason official suggested it was a result of China's internal power struggles. "Their [The suspended banks'] top executives were arrested by Chinese authorities," the official said. "It's China's problem, not [North] Korea's."

Indeed, though many banks did pull out of Rason, some are still operating there. The names of Chinese banks, moreover, could be seen on signs at a local casino notifying patrons that debit cards are accepted and remittance services available. The debit charge was 5% and the remittance charge 8%.

In July 2015, Chinese President Xi Jinping -- who has been consolidating his grip on power under the banner of a corruption crackdown -- made a surprise visit to the Yanbian Korean Autonomous Prefecture in Jilin Province and inspected various parts of the border region. The purpose of Xi's sudden appearance was not entirely clear at the time, but a year later, many locals say it was at least partly intended to screen out potentially hostile elements to his leadership.

The way local officials described various projects during my latest visit to the border region was also telling: "That one was initiated by the previous administration [under former President Hu Jintao], but this one has been approved by the current administration [under Xi]."

In June this year, Xi met with Ri Su Yong, vice chairman of North Korea's ruling Workers' Party and a close aide to Kim, on his visit to China. Though Xi is acting in line with the international community's attempt to put pressure on Pyongyang with sanctions, he nonetheless agreed with Ri to work together to strengthen the historically close relationship between their two countries.

It seems safe to say, as the professor in Dandong observed, that domestic politics has indeed become a third variable in the already complicated equation of North Korea-China economic ties.

A bridge to ... ?

A 3.02km, four-lane suspension bridge stretches over the Yalu Jiang river, connecting Dandong and Sinuiju.

Newly completed but not yet opened, the bridge is a perfect symbol of the ups and downs of the bilateral relationship. The 2.22 billion yuan ($333 million) project was greenlighted six years ago and has been funded entirely by China. It is expected to replace the existing Yalu River Bridge, also called the Sino-Korean Friendship Bridge -- built by Japan in the early 20th century, when it colonized Korea -- as the artery between the two countries.

Its opening has been repeatedly postponed by obstacles ranging from the complex global issues surrounding the two countries to disagreement over who should bear the cost of building a road leading up to the bridge on the North Korean side.

Whether and how Xi and Kim break the impasse and open the route is bound to have an impact on the geopolitical situation in East Asia. As such, the ultimate fate of the beleaguered bridge is a matter of much interest for the entire region.

Atsushi Ijuin is the lead economist at the Japan Center for Economic Research.

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