Sino-NK

As the influence of Jang Sung-taek recedes from Pyongyang and the borderlands trade between China and North Korea attempts to find a new footing, Chinese views of the business environment in the DPRK are more important than ever.

Thus we return to an extensive article originally published in the Chongqing Morning News (重庆晨报) in April 2013. The article has been widely reproduced in Chinese online, and we can now bring you the full English translation, having done some excavation of its contents back when the piece was originally published.

What seems of note in the article is the picture it gives of the historical development of Chinese private trading and investment in the DPRK from the 1990s to today, and also the sense it gives of the outlooks of the Chinese businessmen featured (under pseudonyms).

Their experiences remind us of some familiar economic lessons, including that:

1. Imperfect markets can lead to extraordinary profits;

2. this may be particularly true amidst circumstances of extreme human desperation;

3. planned economies, especially where controlled by fear, are slow to acknowledge and adapt to new conditions, especially conditions beyond their dictate (this article suggests 11 years from when Chinese private traders first entered the DPRK to when North Korean representatives began to bypass them effectively; but

4. following formal acknowledgement of the problem, can be highly systematic in their response.

In relation to the second point, the article suggests that the local Chinese businessmen themselves, whilst not desperate in any sense comparable to the North Koreans encountered back in the 1990s, appear to see few other opportunities for upward mobility; and that more recently (perhaps ironic in view of international sanctions) some may have felt driven into investment in North Korea by the pressure of the global competition in labor intensive industries.

The End of the Era of Huge Profits: Mainland Businessmen Talk Sino-DPRK Border Trade” [内地商人谈中朝边境贸易：暴利时代终结], Chongqing Morning News, April 18, 2013.

[Summary] “Sure, you can do trade with North Korea, but it is best not to invest there.” Among the circle of border tradesmen in Dandong, this sentiment has long since become conventional wisdom. Setting aside the many rumors of Chinese investors who are at an impasse and unable to collect their debts [from North Korea], among the circle of Dandong businessmen, North Korean’s domestic political and economic changes, along with the current unfathomable situation of the Korean Peninsula, remains an immovable shadow over their hearts.

[Article] “You can do trade with North Korea, but it is best not to invest there.” In northeast China’s largest border city of Dandong, local businessmen always warn foreign counterparts arriving from afar that this is the case.

But in the past two decades, there are still countless Chinese businessmen cropping up like seashells in Dandong, doing their own business in this highly anticipated border city.

Unfettered by United Nations Sanctions [联合国制裁不了]

At noon on March 22, the sun shines over Dandong, but the bordering Yalu River is still buffeted by cold winds and waves (依然寒风凛冽).

The spotless sidewalks abutting the Yalu River are, as usual, full of small traders wrapped in thick coats, trailing the tourists by selling cigarettes, stamps, and similar commodities brought in from the Korean side of the coast. Finding tourists who expressed interest in North Korea’s current situation, the small traders stated bitterly: “Yesterday was World Sleep Day” (世界睡眠日), so over there, they really did it well by pulling off an all-day alert.”

“Over there” refers to the other side of the river, North Korea’s largest border city, Sinuiju. On March 21, many people of Dandong could hear a shrill air raid siren (凄厉空袭警报声) coming from the other side. A day earlier, North Korea’s official media had said that the Korean People’s Army was “ready for a fight with South Korea and the United States.”

“What will happen in the future? No one has any idea.” In Jiadi Square (佳地广场) close to the Yalu River in Dandong City, Zhao Qiming, one company’s general manager, is pessimistic in his prognosis for Sino-North Korean trade. In his office, Li Xingtai, an old friend and boss of another trading company who is drinking tea and having a chat, nods in agreement.

Zhao Qiming‘s company is situated to the side of of Jiadi Square overlooking the river, only a few minutes by foot to Dandong Port. Even though North Korean officials said that the Korean peninsula was just “on the verge of a state of nuclear war [一触即发的核战争状态],” border trade between China and the DPRK continued just as before across the Sino-Korean Friendship Bridge over the Yalu River [仍然一如既往横跨鸭绿]. From time to time, he could see a few more of the unloaded trucks from across the river slowly approaching [不时能见到几辆卸完货的卡车从江对岸缓缓驶来]. According to statistics, goods transited through the port of Dandong account for about 80% of Sino-DPRK trade.

According to one Dandong raw textiles trader, a couple of hundred trucks are crossing the bridge per day, “just like before, more or less.”  He believes that his own business has nothing to do with [没什么关系] the latest UN Security Council resolution on sanctions against the DPRK, since “We sell civilian goods, and UN Sanctions cannot hamper that.”

According to one local trader, the South Korean government arranged for someone to survey the Dandong port for the purpose of recording the number and varieties of goods coming through. Last year, says the trader, he met this South Korean: “That guy makes $2,000! But he’s lazy [不过总在偷懒] and paid a few hundred dollars to hire Chinese people to help him record the information.”

The tense situation had no impact on the Dandong tourism industry. A North Korean official in Dandong responsible for tours to DPRK [朝鲜旅行社的官员] said that North Korea would shortly be launching new tourism projects and attractions in the country, such as a farm on the outskirts of Pyongyang. “Tourists can visit representations of our rural areas, and also can make rice cakes with our villagers,” the official said.

Yu Shuangpeng (于双鹏), the general manager of Liaoning Yalu River International Travel Service Co. (辽宁鸭绿江国际旅行社)  said that he is currently in a quiet season [淡季」for tourism to the DPRK. In the first quarter of 2013, his organization brought only about 300 Chinese tourists to the DPRK, which is roughly equivalent to figures from the same period in previous years. “Contrary to what one might expect, due to the tense situation, the number of Western visitors has slightly increased [反倒是因为局势紧张，西方国家赴朝游客的数量还略有增加]” [he says].

A Golden Age [黄金时代]

Looking out into the distance from Jaidi Square, just on the opposite bank is Sinuiju, North Korea’s largest border city. This office block is almost completely occupied by Chinese companies engaged in trading goods, which advertising in the elevator indicates range from heavy-duty trucks, steel, fertilizer, household appliances, clothes, shoes, hats and various general merchandise. The DPRK Consulate General in Shenyang’s Dandong consular office is located on the 21st floor of this building.

Over the past two decades, these Chinese companies have organized a steady stream of all kinds of goods through the Sino-Korean Friendship Bridge, and after a short stop in Sinuiju, to all over starving North Korea. In return, from North Korea Chinese companies receive U.S. dollars, or perhaps goods such as minerals, timber, marine products or medicinal herbs.

Between the two of them, Zhao Qiming and Li Xingtai have tallied over 50 years of business partnerships.  Seeing that they are wearing designer clothes and shiny Rolex watches, and given that they’ve been doing trade with the DPRK in the past 20 years, one can see that they have enjoyed considerable success.

In 1993, these friends together formed part of the first batch of Chinese-North Korean border trade businessman. Prior to this, Li Xingtai had worked for a state-owned import and export company in Liaoning Province for many years, in the early years in contact with the DPRK-related department, after which he took the risk of moving into North Korean trade and built up a lot of contacts. It was at his suggestion that Zhao Qiming ventured into the field of foreign trade which was just then opening up to the private sector.

“For about six or seven years, I swear you could make big money practically with your eyes closed.” So Li Xingtai describes his early experience of DPRK trade. He has many proud stories of trading: for example, in 1993, he had sold to North Korea several hundred thousand shirts of which there was a domestic inventory glut: “the purchase price was one Chinese yuan, the sales price was two dollars.”

In the early period of trading with China, being under a planned economy system, the DPRK showed an extreme lack of understanding of international markets. The North Korean trade companies representing the government would receive procurement targets and prices issued by the state and price of orders, and immediately place orders with Chinese traders. North Korea to this day has no non-governmental commercial organizations (民间商业机构), and all commercial activity is entirely controlled by  large or small state-owned trading organizations.

In the eyes of Li Xingtai, in early period, exploitation of the DPRK’s extreme lack of information and the large quantity of cheap Chinese goods, meant that the profits obtained through trade with the DPRK was far greater than Chinese businessmen could obtain in any other country in the world. “In those days they did not even know how to make a procurement inquiry,” said Li Xingtai.

This kind of situation was continuing through 1998. In that year, Li Xingtai exported a batch of Chinese-made Jiefang trucks to North Korea, “For each truck sold for $6,000, I earned $1,200 profit.”

Besides the high profits, some of DPRK’s foreign trade practices also left Zhao Qiming dumbfounded. It is his impression, after the 1994 outbreak of food shortages had lasted for many years in the DPRK, that a trading company had sold a large amount of well kept mechanical equipment to China as scrap metal in exchange for basic living necessities.

This kind of trading, which Zhao Qiming called “selling blood in exchange for life (卖血换命),” lasted for several years, until, after the paralysis of many North Korean manufacturers, it was finally [expressly] forbidden by the DPRK government.

In Dandong’s Chinese border commercial district, talking about North Korea-related topics in public is a taboo. In addition to preventing disclosure of trade secrets, business people are more worried about “getting into trouble” (惹上麻烦).

The following is an unproven but widely circulated story in Dandong business circles: The boss of a local company was drinking with friends in a hotel, and he mentioned a little of what he had seen and heard on his trip to North Korea. Not long after, the owner was included in a DPRK list of persons prohibited from entering the country. Later, someone divulged to this boss the reason: that day at the wine table, he had “said words that should not be spoken,” and these words had been heard by the North Korean side.

According to data disclosed by the Chinese Embassy in the DPRK, in 1993, bilateral trade between the two countries reached nearly $900 million. With subsequent economic hardship in North Korea, trade between the two countries steadily declined, reaching a trough of $370 million in 1999.

Nonetheless, those Chinese traders who “had relationships” (有关系) inside the North Korean government could make profit out of the bleak market. Li Xingtai, having already had many years maneuvering within North Korean political and business circles, had long known how to profit from them. “There it is a planned economic system, and in everything the leader has final say,” he says. Relying on both sides’ tacit understanding (心照不宣) of their “mutual benefit”, he travels to North Korea often, always as a guest of the other party. The North Korean senior officials that he has made friends with includes even senior generals of the Korean People’s Army.

More than a decade ago, Li Xingtai, with a partner to invest in North Korea opened a production of lubricating oil factory. According to Li Xingtai, the factory occupies an area of 20,000 square meters, and “North Korean television even made a special broadcast on the news of the opening of the plant”.

Likewise, Zhao Qiming’s businesses also made steady progress. In the country to build up a complete procurement system – to the extent permitted by Chinese law – he was almost able to provide the North Korean demands as small as an apple, as large as trucks and such like items. For him, the work is very simple: to fight for the orders of the Korean trading companies; select a seller on the basis of lowest prices in all of China for procuring the appropriate materials; and then export. A truckload of goods is shipped out in exchange for a big handful of dollars, or a pile of minerals.

In this mysterious kingdom of North Korea, Li Xingtai, Zhao Qiming were among the first batch of successful gold diggers. Business success stories such as theirs circulated widely, and as the North Korean economy moved away from its lowest point, attracted even more Chinese businessmen.

“Entering the 21st century, as the DPRK economy recovered gradually, bilateral trade recovered rapidly.” Thus did the Chinese Embassy in Pyongyang describe the change in trade between the two countries in the new era. After passing through its lowest point in 1999, the bilateral trade volume between China and the DPRK increased nearly ten times over the next decade. In 2012, total bilateral trade was more than 5.9 billion U.S. dollars, within which North Korean imports amount to more than 3.4 billion U.S. dollars.

Dandong City Foreign Trade and Economic Cooperation Bureau disclosed data show that as at the end of 2011, Dandong City’s various foreign trade companies, cross-border trade companies and independent manufacturers numbered more than 2,000, of which small scale enterprises engaging in border trade with the North numbered more than 500. In addition, bilateral trade also includes old-fashioned barter and spot transactions such as for newly additional processing, and export transit services, and so on.

The end of the era of huge profits　[暴利时代终结]

On the streets of Dandong, one can  find any random restaurant owner, taxi driver or hotel staff and inquire, and they inevitably will have friends and relatives who have been or are doing business with North Korea. In the eyes of the locals, this is one of the few opportunities for prosperity.

 A 20-minute drive from downtown Dandong in the town of Wulongbei [五龙背], lives a man named Zhao Yongjian. Zhao Yongjian, aged nearly 60 years, is fluent in the Korean language. After drinking a few mouthfuls of spirits, the old ethnic Korean will tell a stranger of his past years in Korea. Once a source of great pride, in the end it was an illusion-shattering trip to a foreign land.

About 15 years ago, to take advantage of his relationships with many Korean relatives, Zhao Yong-Jian began travelling for cross-border trade. As distinct from Li Xingtai and Zhao Qiming, in the early days he played the analogous role of minerals dealer in North Korea, leaving North Korean trading companies with a truckload of copper ore powder, iron ore powder or even rare metals such as molybdenum minerals which were taken to Dandong where Zhao Yongjian would resell them to domestic customers, paying himself about 20% commission, with the remaining payment going to the other party.

In addition to minerals, Zhao Yongjian also tried to explore other business opportunities. For example, he was in cooperation with the DPRK trading company engaged in waste electronic products recycling: the North Korean side was responsible for dismantling and smelting dilapidated electronic products imported from Europe and the United States, he was responsible for selling the smelted metal outputs in Chinese markets. Producing minerals in this way, this new business wasn’t even risky because with his “new friends”, he didn’t even need to invest.

Of Zhao Yongjian’s income, the use of a portion to bribe [“打点”] the heads of North Korean trading companies was essential. For this reason, he often stayed for long periods in North Korea, regularly entertaining colleagues with meals and drinking alcohol. At that time, he said that he was “getting old making money [钱挣老了].”  In northeastern dialect, this means making a lot of money.

But in all countries, even North Korea, the market environment is not static.

Li Xingtai’s impression is that it was around 2004, with the emergence of a large number of Chinese businessmen, that the Korean trading companies also frequently sent their representatives back and forth between China and the DPRK, and even based some of their people in Dandong. Such Mandarin-speaking representatives were now seen in Dandong city from time to time, most of them having yellowish skin, and wearing dark colored clothing, many not wearing the badge of the North Korean leader on their chests.

Aside from Chinese businessmen, the outside world has almost no chance to contact with this group, they only talk about business, and aside from this shun every topic. They have an agile business sense, but with irrelevant people always maintain a polite distance.

One can often see these kinds of representatives in a restaurant called “Pyongyang Pine Garden [平壤松涛园]” in Dandong. Opened by Koreans, the restaurant is located on the road that is just on the riverside of the border with North Korea.

The restaurant’s walls hang a number of brightly colored yet slightly chilly landscapes, whilst the TV is always showing Korean People’s Army military exercises or programs on achievements in industrial construction. Set against the riverside road whose neon lights flash through the night, the street-facing curtains of this restaurant are always tightly drawn (拉得严严实实).

On the night of March 26, a Korean representative walked into the restaurant wearing a khaki overcoat and tinted sunglasses, and ordered one dish and a bottle of Yalu River beer. The television was showing footage from a speech by the North Korean leader. The man periodically put down his bowl and chopsticks and walked out in front of the TV to watch diligently for a while.

In the eyes of the Chinese businessmen, these quiet representatives are formidable opponents.

“Through personal on-site visits and via the internet, they quickly grasped the ins and outs (底细) of the Chinese market, very clearly and tangibly” (一清二楚) said Li Xingtai. After these North Korean representatives came into contact (i.e. , competition) with “China’s most expert price warriors” (最擅长价格战的中国人), the era of huge profits in Sino-DPRK trade was brought completely to an end.

Zhao Qiming offered this example: recently he sold a $39,000 Chinese lorry for a profit of only $ 150, whilst the profits on a tire are already less than a dollar. “They know the purchase price for Chinese goods even more clearly than me, even including in their calculations the Chinese government export tax rebate.” Zhao Qiming sighs. For the past few years, he has come to be “struggling to make enough to survive” [靠走量才活了下来].

Of over ten desks at Zhao Qiming’s offices, half of them are completely empty. That bears witness to the difficulties his company has had in expanding in recent years.

In 2007, Zhao Yongjian’s business also terminated. Up until that point, the formerly congenial (North Korean) trading companies were already rarely sending him goods. Zhao Yongjian believes that the other side were wanting to take even more of the profits for themselves. Since then, he has tried to cooperate with others in North Korea to build wholesale markets, and invested several hundreds of thousands of dollars in North Korean copper mining, but ultimately without success.

Regarding the projects’ failures, Zhao Yong-Jian believes that the lack of a good North Korean partner is one of the key reasons. He said after bringing himself to North Korea the people from the trading companies with whom he would talk about cooperation were always “unreliable, backward-thinking, shifty North Koreans [不靠谱老想着忽悠朝鲜人]”, leaving their counterparts completely resentful (十分不满).

Zhao Yongjian says with some resentment that in the earlier periods, some of the original Chinese businessmen showed little integrity in exploiting North Koreans’ typical lack of trading experience, receiving shipments and then immediately abandoning them. “In the 1990s, because of this, four North Koreans were executed by firing squad,” he said, extending four fingers.

But it is not only Chinese businessmen who don’t keep their promises. On May 22, 2001, the Xinhua news network reproduced an analysis of the North Korean market by the Economic and Commercial Affairs Counselor of Chinese Embassy in the DPRK, which included reference to the following situation: a serious phenomenon of North Korean trading companies (all state-owned) defaulting on their debts to Chinese companies, having accumulated overdue debts of about $230 million from 1992 up to the first half of 1996.

In addition to the partner problem, Zhao Yongjian believes that lack of funding was his biggest obstacle. “Whoever can bring the greatest profits, the Koreans will collaborate with them” [谁能带来更大利润，朝鲜人就跟谁合作].  As this loser in business admits, before the Korean trading company completely terminated cooperation with him, he had already been reduced to a non-essential role in his counterpart’s mind.

On constant tenterhooks [成天提心吊胆] 

“When the Yeonpyeong Island shelling incident occurred in 2010, I still had ten thousand garments in North Korean production, “said Dong Feng, General Manager of Dandong City’s Dong Feng Garment Co. Ltd. Naturally, it was a day that gripped him with trepidation [让他心惊肉跳]. But fortunately, war did not break out that day, or else I would have suffered a huge loss.”

In 2003, Dong Feng made a bold decision that orders received by his own factories from Europe and the United States should be transferred to North Korea, for North Korean workers to complete production. Prior to this, Dong Feng, who is subcontracted to manufacture clothing on behalf of Western clients all year round, had already been racking his brains [绞尽脑汁] over his factories’ survival, as Chinese manufacturing costs had continued to escalate, and his garment factories had already been close to unprofitable for several years in succession.

“Later, I found that the only way out was to go to North Korea.” Wearing gold spectacles and with a briefcase slung over his arm, Dong Feng exhibits the temperament of an adventurous businessman. Before this decision, he knew not much more about North Korea than the average Chinese.

Through a friend, he contacted a North Korean trading company headquartered in Pyongyang, and soon reached a cooperation agreement with them: he would provide the samples and materials, and prepay them approximately 30% of the subcontract value; they would arrange for factory production, and after completion of the task, would deliver the goods to receive the balance.

The North Korean trading company had arranged for Dong Feng to conduct an inspection tour of the Korean factory. Dong Feng described it as “just like China in the 1970s, plant and equipment were relatively old.” “Yet,” he added, “the environment is very clean, and all items arranged in order.” But apart from the factory director and technical staff, he never had a chance to talk with North Korean workers producing clothing for him.

In recent years, Dong Feng sent more than one hundred thousand production orders to North Korea annually, and compared with his former Chinese factory, his cost of production decreased by 30%. The former garment factory has now been dissolved for several years.

Whenever he gave a production order, he had to closely supervise the co-operation of a number of North Korean trading companies. Communicating with his counterparts is also one of the most frustrating things as these trading companies usually only have one phone for international calls, “calling in the past, eight out of ten times the line would be busy, and after getting through, the person you want to find is often not in the office”, Dong Feng says, and if he asks someone else to go and say he wants to find someone, “the cost is eight yuan (renminbi) per minute.”

Many times Dong Feng had to endure such suffering. “It is delivery time and product quality that are key” he said, and if he did not pay close attention to these two things, should a problem arise, he could not pass on the loss to the North Korean side. The reason is this: were he to be compensated for such  losses, not only would a part of the revenue in the North Korean trading company’s plan be forgone, but it could also affect the leader of the trading company’s career, and this is the situation that his counterparts want to avoid above all else.

Having previously encountered such a situation, Dong-Feng would rather absorb the loss and keep the peace [掏腰包息事宁人]:

“If you want to pressure the [DPRK] trading company, you might never see even their shadow again [你要把商社逼急了，可能就再也见不到对方的人影].”

The only thing that he is pleased about is that after working with him for many years, such incidents have already become rare, and the quality of clothing sent out by the Korean factory is no longer inferior to that of the Chinese factory.

Dong Feng once had the investment idea of engaging in the refining of high purity magnesium oxide in North Korea, but after the warnings of close friends he soon backed out. The Chinese investing in North Korea “all are people with a background” [都是有背景的人], he said.

Li Xingtai seems to be just such a person, as, within his stories of past business experiences, from time to time North Korean heavyweight [高权重] government commercial figures appear. According to him, spending millions of dollars to install world class equipment in the lubricating oil factory attracted even more of the attention of North Korean senior leadership.

But it was exactly this that made him place high hopes on that project, which several years ago had immediately “gone yellow” (i.e. fallen through; “黄了”). Like all experienced Chinese traders in North Korea who do not talk about themselves, Li Xingtai refuses to discuss the past [往事闭口不谈],  but with a scowl on his face says only that he has “been excluded” (自己“被排除了)  and that the equipment is still in North Korea.

In 2007, Li Xingtai was in the cafe of Pyongyang’s Yanggakdo Hotel when he experienced this scene: whilst chatting with a Jilin businessman who had long been attempting to recover payment from a Pyongyang-based North Korean trading company, the man suddenly had a brain hemorrhage and died the next day on the train home. Beforehand, the man had told Li Xingtai that he had already been  demanding the debt for three years.

As in the early years of his business activities Li Xingtai often stayed a number of hotels in Pyongyang, he got to know a special community of Chinese businessmen on long-term stay in North Korea to chase debts. “It is estimated that there are more than one hundred and eighty such people,” said Li Xingtai, and often these people are in a bleak situation as debt collection leads nowhere.

In August 2012, the Xiyang [or” Western”] Group of Liaoning Province published a document on the internet which stated that they had invested 240 million yuan into an iron ore processing project in North Korea but the Korean partners unilaterally broke off the contract, accusing the other side of fraud and malicious intent, wanting to drive the company out of North Korea [朝鲜合作方单方面毁约，并指责对方欺诈及恶意将该公司赶出朝鲜].  After a number of reports on this in the global media, the Korean Central News Agency made a rare response to this commercial dispute, saying that the Chinese company was suspected of fraud and corruption, and therefore bears the main responsibility for violation of the agreement.

This left a huge shadow in the minds of Chinese businessman. Zhao Qiming said that the Xiyang Group’s fatal error was that it should not have gone to North Korea to invest. ” Once there is a dispute, how could your company beat this country, North Korea [一旦出现合作纠纷，你一家企业怎么可能赢得了朝鲜这个国家]”?

Although in trade with the DPRK he has earned a lot of money, as this businessman describes it, “it seems as if, when sitting on the aeroplane, the more times I sit, the more fear I feel in my heart.” In the early years, he and Li Xingtai had bitter experience of Korean trading companies delaying payment so much that they defaulted on their debt.

Now, when trading with the DPRK, unless there is extraordinary trust in the North Korea trading company, they always require immediate cash settlement: when trucks containing merchandise pull into Sinuiju, North Korean officials must first pay the purchase price, then the cargo can be unloaded, “or else we just turn the car around and go home.” In the Dandong border trade area [丹东的边贸商圈里], this is the only method of exchange to make Chinese traders feel at ease.

 “I’m nervous all day long; maybe someday I’ll just quit.” Drinking the last sip of tea, Li Xingtai picks up his phone, gets up and says goodbye to his colleague Zhao Qiming. As he stands on the glass floor, over on the Sino-Korean Friendship Bridge far beneath his feet, more than a dozen vehicles large trucks filled with goods slowly enter North Korea.

([Note in original:] within this text, some persons have been given pseudonyms)

Source: “The End of the Era of Huge Profits: Mainland Businessmen Talk Sino-DPRK Border Trade” [内地商人谈中朝边境贸易：暴利时代终结], Chongqing Morning News, April 18, 2013. Translation by Matthew Bates and Adam Cathcart.