China’s North Korea Investments Safe Despite Export Ban

China’s North Korea Investments Safe Despite Export Ban

Investing in a place like North Korea is always fraught with danger, yet China’s assets in the hermit kingdom remain safe despite the export ban.

Political risks are the major determinant of Chinese investments in North Korea (DPRK). On 23rd September 2013, China’s Ministry of Commerce released a 236-page list of technologies and goods banned from export to North Korea, selected because of their possible use in building nuclear, chemical and biological weapons. Beijing’s action was meant to show China’s implementation of U.N. sanctions on North Korea. Will this move increase the political risks for Chinese investors currently in North Korea? In other words, will the North Korean government protest against China’s decision by mistreating Chinese investors?

To answer these questions, we need to first look at how harsh this export ban is in political terms. It is the first time China has explicitly banned the export of “dual-use” equipment, chemicals and technologies to North Korea and has been regarded as the start of a significant shift in China’s policy towards DPRK. It is true that China now takes much tougher tones towards North Korea than before. But calling it a significant policy shift is exaggerating the issue.

China has distanced itself from North Korea for a while. In 2006, China, for the first time, agreed to U.N. sanctions, halted certain banking transactions and cut petroleum shipments to DPRK. In 2009, China condemned DPRK for their nuclear tests and supported stronger U.N. sanctions. Earlier this year, China backed a U.N. sanction against North Korea after Pyongyang’s third nuclear test in February. The latest ban on export is a consolidation of China’s previous stances. Does this suggest China taking firmer lines against DPRK? Yes. But this new policy still lies on the old policy trajectory. Moreover, intelligence suggests that North Korea might have mastered enough technology to sidestep sanctions, which undercuts substance of China’s export ban.

So, is China’s tightening policy going to threaten its political ties with DPRK? No response from North Korea regarding China’s ban has been released as of 29th September 2013. Hence, nobody can say for sure how badly this policy will play out to hurt the alliance. But it is likely the two parties will maintain political status quo, given that the export ban carries less political weight than the concrete condemnations from China in the past eight years.

China’s foreign direct investment (FDI) in North Korea is highly politicized. Beijing has tried to convince Pyongyang to adopt economic reforms since Premier Wen Jiabao’s trip to North Korea in 2009. China intends to stabilize the peninsula by showing DPRK real money and making the country wealthier. Investment projects are concentrated in the Rason Economic Zone, a coastal area near China and the Russia border. Chinese companies have also focused on developing mineral resources with cheap local labor in North Korea.

Most companies, however, have been reluctant to move into North Korea because of expropriation risks. Therefore, the Chinese government’s foreign policy has played a key role in growing investments in DPRK. On the demand side, DPRK provided favorable terms to investors in Kaesong Industrial Complex and the Rason Economic Zone to attract FDI. It recently started actively wooing foreign investors. In June 2013, North Korea announced plans for economic development zones where maximum 50-year lease on land will be provided, accompanied with lower corporate tax rates and free buy and sell rights on buildings and land.

The balance of FDI’s demand and supply can break if one party no longer feels the need to commit to economic cooperation. After all, it is a political decision, not market mechanism. A strained bilateral relationship would definitely raise the risk premium. The recent ban on exports may raise tensions and risks for investors. On the bright side, however, North Korea has too few friends it can depend on economically, which reduces the chance of expropriating Chinese investments in a political backlash.

Categories: Asia Pacific, Economics

About Author

Roger Yu Du

Roger works for a strategic advisory group that provides services to investors focused on Asia. He holds a master’s in International Political Economy from the London School of Economics and received his BA in International Relations from Fudan University in China, with a focus on East Asian affairs.