More hurdles remain in NK-China biz ties

North Koreans struggle to walk in Pyongyang in this image released by the North’s Korean Central News Agency, Monday, due to recent heavy rain that the impoverished country says has caused massive damage. (Photo : Yonhap)

Despite bolstered business ties between North Korea and China, accusations by a Chinese firm over boorish conduct suggest that the allies have yet to clear major hurdles.

Analysts say that the case of Xiyang, which claims the North reneged a major mining deal, show the need for caution in gauging such business ― seen as key to Pyongyang’s economic development.

The Liaoning-based firm, which inked the joint venture in 2007, accused its partner earlier this month of corruption and other behavior such as demanding prostitutes during trips. In an internet posting, it said working in the North was a “nightmare” and that it would file for arbitration.

The demands came after the firm had invested over $37 million and sent 100 workers to the North. Its partners then demanded that 16 modifications be made to the contract including new fees for land and natural resource use and wage hikes for North Korean workers. After the demands were denied, the North reportedly suspended power and water supply and deported workers.

The allegations point to institutional problems in the North that remain a prohibitive concern for many investors, including the Chinese.

Analysts say that while the cooperation helps Pyongyang develop under young leader Kim Jong-un, who took over in December, the North still lacks a regulatory environment to attract investment.

“In terms of a microeconomy, the North just isn’t ready,” said Yang Un-chul, a North Korea watcher at the Sejong Institute. “Not only do they not have any laws or regulations, but they lack any infrastructure for power and technology. Who can survive that?”

Watchers say foreign firms are responsible for developing infrastructure and bringing equipment into the North, but even then it is not guaranteed that profits get back to their country.

Still, the Chinese commerce ministry last week said it would encourage firms to invest in the North, focusing on special economic zones near the border. This came during a high-profile visit by Jang Song-thaek, the uncle of North Korean leader Kim Jong-un and a top policy maker, to Beijing aimed at accelerating joint development of the zones.

Beijing uses the interaction to coax Pyongyang to follow its reform path, believing it decreases the chance of major instability in the North and disrupting the status quo. This dovetails with China’s efforts to revive its northeast provinces, two of which border the Stalinist state.

Beijing has built a road into Rason, one of the economic zones included in the agreements, giving landlocked Jilin and Heilongjiang access to Rajin, the region’s northern-most ice-free port.

A study last year by the Peterson Institute for International Economics found that Chinese companies, mostly small private enterprises engaged in importing and exporting, have to adopt special contracts and trading mechanisms to manage risk and provide dispute-settlement options.

The insecure environment prompts most firms to opt for trade instead of investment with the North and this will likely hamper the growth of such exchanges in the future, the study finds.

Observers say that it bears monitoring whether Beijing ­ which in the past has taken a laissez faire approach ­ will now seek to improve this oversight. <The Korea Times/Kim Young-jin>

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