Sino-NK

Along with SinoNK.com analyst Alan Ferrie, experts Stephan Haggard and Marcus Noland have been keeping us up to date on what has been happening — or not happening — in the new Special Economic Zones near Sinuiju. However, it never hurts to get another Chinese point of view on these matters, especially when that point of view is Tang Longwen, whose complaints about North Korean developement in Shijie Zhishi, the magazine affiliated with the Chinese Foreign Ministry, got some press last summer.  Matthew Bates, one of SinoNK’s top-drawer team in the United Kingdom, provides a translation of Tang’s somewhat controversial column.   — Adam Cathcart, Chief Editor

From the Dandong side crossing over into North Korea | Photo Taken by vqmalic and used by Google Earth

 Tang Longwen ［唐龙文］, “Building a “North Korean Hong Kong”: On China Renting North Korea’s Two Islands [打造_朝鲜版香港_租给中国的朝鲜两岛］,” Shijie Zhishi [世界知识］Vol. 16, 2011. Translated from the Chinese by Matthew Bates.

The crucial point is not whether or not the DPRK’s two islands are developed, but whether the DPRK truly opens.

In May 2010, the DPRK’s leader Kim Jong Il visited China, and announced that the fifty-square kilometer Wihwa Island would be designated a free trade zone in which foreign persons based in China would be allowed to enter and exit without a visa, rented to China on a  50 year lease, with an option to extend for a further 50 years.

On 7th June 2011, the Standing Committee of North Korea’s Supreme People’s Assembly ratified the “Wihwa Island and Hwanggumpyeong Island Free Trade Zones Development Plan.” As this government decree indicates, North Korea will exercise sovereignty in the Hwanggumpyeong and Wihwa Island Economic Zones, and has decided to start from Hwanggumpyeong Zone in putting into effect development plans.

On the 8th June, in a flurry of activity, the “Chinese-North Korean jointly developed, jointly managed Hwanggumpyeong and Wihwa,Island Economic Zone opening ceremony” dropped its heavy curtain.[1]

Building a North Korean Hong Kong |  The Wihwa Island and Hwanggumpyeong Islands, property of the Democratic People’s Republic of Korea, are located on the Yalu river which is the border river between China and North Korea, and are considered part of the city of Sinuiju. The two islands have few inhabitants.

At present, in order to attract foreign investment, North Korea is offering Chinese companies a 100 year lease in exchange for development, inviting them to the two islands to build “North Korea’s Hong Kong.”

The Wihwa and Hwanggumpyeong Islands are separated by the Yalu river’s  upstream and downstream reaches. The Yalu meets with tributary rivers which encircle and form the islands.

The land on the Wiwha and Hwanggumpyeong islands have soil comparatively fertile, and the current inhabitants are engaged mainly in agriculture. But as no effective dam system has yet been constructed, the threat from flooding is a severe one.

Wihwa Island, separated from our country’s Dandong City by the Yalu River, is the Yalu river’s first large island. Hwanggumpyeong Island, land linked with Dandong City and separated only by wire netting (the former riverway has already narrowed, and it almost meets the main land), is the Yalu River’s second large island, and is a place of cereal production for North Korea’s Sinuiju district.

What North Korea is Offering |  Presently, North Korean officials’ proposals include the following:

Firstly, the construction of a free trade zone; secondly, to construct a travel, catering and entertainment zone; thirdly, construction of a high-tech agriculture zone; fourthly, construction of an export processing zone (similar to the Kaesong Industrial Complex); fifthly, construction of a golf course; and possibly other large sports grounds.

In the future, those in Hwanggumpyeong Island will not only be able to use telephone land lines, but also internet and mobile phones. Apart from manufacturing industry, foreign financial institution will also be able to establish a presence. The two zones will implement labour contracts where foreign enterprises can autonomously hire and fire North Korean employees, private property rights will be guaranteed, and investors will be able to transfer assets to other people.

Although trade is slow to grow, the frontier city of Sinuiju is a potential take-off point for increased Sino-DPRK trade | Photo Courtesy of PORT Technology International

The Disparity Between the Ideal and the Reality |  Dandong City is one of China’s largest border cities, and is the largest trading post between the China and the DPRK; 80% of Chinese-North Korean trade passes through the Dandong trading post. Presently, the new large bridge between China and the DPRK has already been approved, numerous North Korean institutions in Dandong established representative offices, and Dandong is also the city with the most North Korean inhabitants in all of China. As we launch the Liaoning coastal economic belt, Dandong is a figurehead city, with natural advantage conditions and huge scope for economic development.

Facing Dandong across the river, the city of Sinuiju is the fourth largest city in the DPRK, is where the government of North Pyongan Province is situated, is a base of heavy industrial and light industrial base just within North Korea’s border. Sinuiju functions as North Korea’s most important port for external trade, formed with a unique natural advantage for border trade. North Korea has a few large companies in Sinuiju which have all established branch or representative offices, working in direct collaboration with Chinese companies. It can be said that this city is the area with the most advantages for Chinese-North Korean economic collaboration.

As data published by China’s customs authorities illustrates, in 2010, North Korea’s exports to China reached USD 1,200,000,000,an increase of 51% on the previous year, principally accounted for by China’s iron ore, coal, and copper base metals requirements.As the data indicates, in 2010 China’s trade exports to the DPRK was USD 2,300,000,000, growth of 23% on the prior year. North Korea’s imports from China are principally foodstuffs and refined oil, used to ease its domestic shortage situation.

But as must be seen objectively, the size of North Korea’s economy is still very small, and the growth rate of PRC-DPRK trade is still relatively slow.

Moreover, there are many factors restricting Chinese-North Korean trade, such as that the North Korean system is different from that of China, with more changes in policy, that its legal system is insufficiently robust, that the development of transportation, electricity and communications and other infrastructure is relatively behind, and that in terms of debt, creditworthiness, exchange rates, and other aspects there exist numerous problems.

As the international community does not currently accept DPRK letters of credit, all transactions must be settled in cash, and in this way the absence of capital liquidity has already produced a very difficult situation, as trade based on spot transactions and barter is difficult to expand.

North Korean government officials believe that if only free economic zones are established in the bordering territories, where both sides are freely able conduct trade, many problems will then be solved.

Most of all, that with the establishment of a maritime customs inspection mechanism, along with a complete set of facilities for international trade including storage, logistics, processing, export, and so on, the completion of a free economic zone will command the world’s attention as an economic bright spot.

However, this author believes, due to the laws, the system and also the restrictions of international conventions, this can really only be wishful thinking.

The Specter of Floods |  In reality, in these two free trade zones that the DPRK is establishing, the effect of floods from the Yalu river is very great, because these two islands lack basic dam defences, when the flood approaches, decades’ worth of construction achievements and huge capital investment can in a moment be turned to nothing (literally, “but soap bubbles”).

In Dandong,to prevent and mitigate against the flooding from the Yalu River, as early as the 1930s and 1940s, flood control dams had already begun to be constructed along the river basin.

Since the reform and opening policies (initiated by Deng Xiaoping in the 1980s), the country has again put great financial strength into constructing and extending protective dam projects, to make Dandong City’s degree of safety continually increase, but North Korea in this regard has invested extremely little, and as a result, every time a flood comes, all suffer its harm.

In the 2010 Yalu river flood hazard for example, due to the widespread rainstorm in north eastern China, the water level of the Yalu river quickly rose to its upper reaches, and located its lower reaches, North Korea’s Sinuiju and Wihwa Island were encountered severe flooding, the like of which comes once in 30 years.

In the event that upon the island various kinds of businesses and public facilities were constructed, if they suffered such bitter flooding, it would cause huge damage. From the significance of this it can be said that if these two islands become free trade zones, then of necessity floods must first be protected against.

And managing the floods will require build huge flood-defensive dams, that is to say, will require huge capital and financial resources investment as a prerequisite.

But these kinds of resources are not abundantly available, and the development value of these two small islands is not at all great, and if investment exceeds productive value, whether or not the project is worthwhile still needs to be demonstrated.

Furthermore, the North Korean system, law as well as other factors possess risks which must also not be underestimated. These need repeatedly to be expounded upon to those Chinese firms interested in participating in this development project.

In addition, we are still able to try borrowing from the experience of North and South Korea’s Kaesong Industrial Park. It can be said that in the absence of China’s support, North Korea would find it hard to have the huge economic strength  to develop the two islands, but without North Korea’s complete economic opening, the actual significance of the development of the two islands is not at all very great.

As a consequence, the key point is not whether or not the DPRK’s two islands are developed, but rather whether or not the DPRK is really prepared to open up.

Know Your Enemy |  People’s greatest worry that the DPRK will just open (and close) its doors as it pleases.

But from perspective of the national interest, whilst the DPRK presently requests joint development of Hwanggumpyeong and Rason, but to our country, our north-eastern region’s “Right to sail the East Sea”[2] through development of the Rason area is much more of interest.

Not long ago our Premier Hu Jintao talked to visiting DPRK supreme leader Kim Jong Il about “expanding mutually beneficial economic cooperation,” which does not at all signify the DPRK for unilateral “aid-type” economic cooperation.

In summary, to paraphrasing an expression from the stock market, ”investment carries risk, and on entering an island one must be cautious.”  The saying (from Sun Tzu’s The Art of War) “know yourself and know your enemy and you will never be defeated” gives a principle that must be followed.

Applying the Sun Tzu Maxim "Know Your Enemy" to Relations with North Korea? | Photo Courtesy of Cultural China