Photo: Bridges spanning the Yalu River from China to North Korea (XNA)

By Chen Yong (陈勇), Sun Li (孙黎)
Issue 585, Sept 3, 2012
News, page 8
Translated by Tang Xiangyang
Original article :[Chinese]

Investing in North Korea can be risky, but it’s certainly alluring.

Since Kim Jong-un became leader, the country has been luring more and more Chinese companies through hints of its own “Reform and Opening Up.”

According to data provided by China’s General Administration of Customs, the trade volume between China and North Korea reached $5.67 billion in 2011, up 62.4 percent from the previous year. Both the volume and growth rate were historical highs.

The bilateral trade volume in this first half of 2012 was $3.14 billion, up 24.7 percent from the same period last year.  Trade in some mining, clothing and electronic products are witnessing even faster growth.

Non-financial investment by more than 100 Chinese companies in North Korea has risen to over $300 million, which covers industries like food, medicine, electronic products, mining, textiles, chemicals, aqua farming and other light industries.. North Korean companies have also invested more than $100 million in China’s catering industry.

Chen Jian (陈建), China’s vice-minister of commerce, said that the Chinese economy is complementary to that of North Korea, and that the two have huge potential for cooperation.

The Plans

Chinese companies are moving slowly into the new business landscape. Even with the geographical proximity between the two countries, there’s a lot of uncertainty.

When Jang Song-thaek, a high ranking North Korean official and uncle of Kim Jong-un, visited China on Aug 13, the two countries announced the establishment of “the Management Committee of Rason Economic and Trade Zone and the Management Committee of the Huangjinping and Weihua Islands Economic Zones.”

Zhang Liangui (张琏瑰), a professor with the Party School of the Central Committee of the CPC, said that in Kim Jong-un’s era, the development of the two islands would be a pilot for economic reform. Compared to North Korea’s “military-first” policy (putting the millitary ahead of all else in the economy), policies that actually improve people’s daily lives will be more popular.

North Korea has expressed a desire to make Huangjinping Island its “little Hong Kong.” Chinese companies are allowed to invest in Rason, Huangjinping and Weihua Island and it’s hoped that their investment will ease tension on the Korean Peninsula to some degree and give China a prominent role in the country’s economy.

North Korea has instituted several preferential policies to hasten Chinese investment in the country and solve its own domestic problems.

Bank of Korea researcher Cui Zhiying (崔志英) stated in a report on Aug 30 that with the economic zone projects along the border of North Korea and China, the former will be more economically dependent on the latter.

The Rewards

Cai Songhe (蔡松鹤), deputy chairman of the Rason People’s Committee, said that foreign investors have the final say on all issues as long as they invest in the country. Imports and exports are duty-free, profits can be transferred out of North Korea and service-oriented companies don’t need to pay income-tax for one year.

Companies investing in the “national encouraged industries” will have priority in renting land at low prices and in good locations. North Korea won’t nationalize foreign investors’ assets and it will offer compensation if it must appropriate any assets.

Cai Songhe also said that North Korea would allow foreign companies to have a large say in whether they register as a wholly-foreign owned enterprise, an equity joint-venture or a cooperative joint venture. They may also decide the company’s management and operation style.

The business income tax in the economic zones is only 14 percent of profits, whereas outside the zones it’s 25 percent. Companies with a history of over ten years in North Korea don’t need to pay business income taxes for three years starting from the year they began to turn a profit. Preferential policies are also set for service-oriented companies and companies investing in infrastructure.

The profits earned in North Korea by foreign companies are allowed to be transferred to another country and won’t be taxed. When the operation term expires, foreign companies can move their assets out of North Korea.

Foreign companies will also get tax rebates if they use profits to re-invest in North Korea. Foreign investors staying in Rason Economic and Trade Zone don’t need a visa to enter the country and land can be rented for up to 50 years.

The DPRK Committee of Investment and Joint Venture opened a representative office in Beijing at the beginning of the year called the North Korea Investment Affairs Office that acts a liaison with China. It’s the only oversees office the committee has.

According to the office’s website, the minimum monthly payment for North Korean workers is 30 Euro ($38)  plus seven Euro ($8.82) for social insurance fees. However, there’s no restriction for Chinese workers. The average monthly income for workers in the Kaesong Industrial Zone is $110.   

North Korea also exempts duties on imported equipment for foreign companies, as well as duties on exports from non-joint venture companies. The government will waive the land use tax of one Euro ($1.26) per square meter and there’s no restriction on the exploitation of underground resources.

The Risks

With so many preferential policies, investing in North Korea can still be uncomfortably risky. The volatility of the political situation is a constant concern, and there’s also worry that the flooding of Chinese companies into the country might trigger cut-throat competition.

The failure of the Liaoning Xiyang Group (辽宁西洋集团), the largest private enterprise in northeast China, was a result of underestimated risks. The mining and steel manufacturing company signed a deal with North Korea in 2007 to mine iron ore. But in February of this year, North Korea allegedly terminated the deal and cut the company’s access to water, electricity and communications.

Xiyang has since said that investing in North Korea was a “nightmare.” It says North Korean officials arbitrarily changed rules and broke the country’s own foreign investment laws. Reuters quoted Wu Xisheng, vice general manager of Xiyang, as saying, "This isn't just about us - it is about all companies investing in North Korea. They just don't have the conditions for foreigners to invest. They say they welcome investment but they don't have the legal or social foundations."

North Korea has responded, saying that Xiyang was “chiefly to blame” for its failure since it hadn’t lived up to its contract obligations.

Wang Tao (王涛), vice general manager of Dandong Import and Export Company (丹东市进出口公司), said that for a country like North Korea, it would be very difficult to predict the attitude towards foreign trade in the event of a leadership change or other political shake ups. Contracts could be torn up and restrictions on foreign exchange could be increased.

“We take China’s auto parts industry in North Korea as an example,” Wang said. “Those companies are in disorder. Too many companies have divergent prices and levels of quality. There are even fakes and poor-quality products. This cut-throat competition is doing no good for China.”

Wang said that the two countries don’t completely trust each other. Once there are fakes and low-quality products, there will be very bad consequences.