North Korea Standing Up To China – Analysis

By Parameswaran Ponnudurai

Tensions and resentment over China’s investments in ally nations such as Burma, Pakistan and Zambia may have raised eyebrows in recent months. But, North Korea takes the cake with its extremely rare attack this week on a major investment by China, its closest ally and benefactor.

While experts are scratching their heads trying to figure out the factors behind Pyongyang’s blistering attack on China’s large iron ore investment, some believe that nuclear-armed North Korea is possibly sending a message to Beijing that it cannot be pushed around.

North Korea’s official news agency KCNA’s criticism of the Xiyang Group, a Chinese state-owned miner and steel maker, comes four months after new leader Kim Jong Un’s regime upset Beijing with its defiant but failed rocket launch.

“I wouldn’t overread this but I think this is North Korea’s way of saying that ‘we are a sovereign country, we have our own way of looking at these things, we are not going to be intimidated or pushed around,'” Evans Revere, a former senior U.S. diplomat with extensive experience in negotiations with North Korea, told RFA.

The business dispute blew up last month after Xiyang, which had signed up for a 75 percent stake in a U.S.$40 million iron ore processing plant in southwestern Hwanghae-namdo province, said that its 2007 contract was unilaterally terminated by its North Korean partners, who had demanded an increase in royalties and rent.

Xiyang, based in China’s northeast Liaoning province near the North Korean border, also accused North Korea of corruption and fraud.

It said its investment in the impoverished country was “a nightmare” and it had been “cheated” by the North Koreans who had jacked up the costs for land, power, water and labor aimed at driving out the Chinese company.

Pyongyang, which rarely criticizes its giant neighbor or any Chinese entities in public, fired back, saying Xiyang was “chiefly” to blame for the project’s collapse.

“It [Xiyang] has carried out only 50 percent of its investment obligations though almost four years have past since the contract took effect,” KCNA quoted a spokesman for North Korea’s Commission for Joint Venture and Investment as saying.

The KCNA report then accused “hostile forces” of whipping up Xiyang’s comments in what it said was an orchestrated media campaign to smear North Korea’s image.

“The KCNA response was an effort to make the North Korean case that the incident was not one-sided, and they may very well be right,” Stephan Haggard, a Korea expert at the University of California, San Diego, told RFA.

But he noted that there was not even a pretense to an independent third party in the KCNA explanation of what happened.

“Essentially, the government decided, or appeared to decide, unilaterally that the investor was in breach and canceled the investment.”

“Our surveys find that investors do not have much faith in the North Korean dispute settlement,” Haggard said.

Chinese government blamed

Xiyang also blamed the Chinese government for doing little to help companies that ran foul of what it viewed as arbitrary rulings by North Korean officials.

“This isn’t just about us—it is about all companies investing in North Korea,” Wu Xisheng, vice general manager of Xiyang told Reuters news agency.

Xiyang may not be the only Chinese company in limbo in North Korea, which is facing long running sanctions from the international community for its illicit nuclear program.

“I suspect that this is just the tip of the iceberg in terms of North Korea’s interaction with China economically,” Richard Bush, a former senior State Department official, told RFA. “I suspect that there are disputes of this sort fairly regularly and the only thing unusual about this one [involving Xiyang] is that it came to light.”

Bush thinks China will be able to manage these business disputes, saying that its interest in the stability of North Korea “is fairly deep and fundamental.”

“Obviously they are part of a learning curve and they were part of the learning curve with foreign companies operating in China,” said Bush, now a North Asia expert at Washington-based Brookings Institution.

Non-interference

Beijing has kept clear from the row, saying only that such contractual problems should be ironed out by the concerned parties.

“The Chinese government always encourages Chinese companies to invest and do business in [North Korea] and contribute to [bilateral] economic cooperation and trade,” Chinese Foreign Ministry spokesman Hong Lei said in Beijing.

Amid the dispute, it is unclear whether Beijing would agree to a request by Kim Jong Un for a state visit to Beijing to push for more investment. Chinese investors, according to reports, are getting nervous about investing in North Korea.

The Chinese government’s neutral stand on the Xiyang issue and the clamor for action by the company highlight the differences of views within China on dealing with Kim’s unpredictable regime.

“It’s a very interesting insight into the diversity of Chinese views on how to deal with North Korea,” Revere said.

While the row may dampen the flow of Chinese investments into North Korea, some analysts believe Pyongyang is not going to lose any sleep over the loss as it prefers more investments from South Korea and Russia to cut its dependence on China.

“From an economic and strategic logic standpoint, North Korea would not want this situation to go on forever,” said John Delury, assistant professor of International Studies at Yonsei University, according to Korea Times, a South Korean daily.

“It wants to have a serious economic relationship with at least South Korea, Russia and China,” Delury said.

Trade, investment up

Non-financial investment by Chinese companies in North Korea has risen to more than U.S. $300 million, covering industries such as food, medicine, electronic products, mining, textiles and chemicals, while North Korean companies have invested more than U.S. $100 million in China’s service industry, said The Economic Observer, a Chinese weekly newspaper.

Trade volume between China and North Korea reached U.S $5.67 billion in 2011, up 62.4 percent from the previous year. Both the volume and growth rate were at historical highs, based on data provided by China’s General Administration of Customs, the newspaper said.

Bilateral trade in this first half of 2012 was $3.14 billion, up 24.7 percent from the same period last year, it said.

During a visit last month to Beijing, Kim Jong Un’s uncle Jang Song Thaek received a Chinese pledge to rapidly begin work on an economic zone in Wihwa, an island on their common border.

But with the latest business spat, which exposed the perils of doing business in North Korea, how is Pyongyang going to woo investments and boost trade?

“I guess the positive side of [the Xiyang episode] is that it is through disputes like this that North Korea is forced to realize that it needs to change the business environment and provide better rule of law, better certainty and predictability and the sort of institutional environment in which economic
intercourse takes place,” Bush said.

He said China underwent a similar difficulty more than three decades ago when it began opening up to foreign investments.

“It is a very incremental process and the job is never done and sometimes a country will fall back but I think that China from its own experience might understand that this will be an incremental learning process with the North Koreans and it is still worth doing.”