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Viewing cable 06SEOUL1031, RECENT TRENDS IN PRC-DPRK ECONOMIC RELATIONS AND

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Reference ID Created Released Classification Origin
06SEOUL1031 2006-03-29 08:22 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Seoul
VZCZCXYZ0007
OO RUEHWEB

DE RUEHUL #1031/01 0880822
ZNR UUUUU ZZH (CCY TEXT PARA 1 & 2 ADADE3BB MSI7542)
O 290822Z MAR 06
FM AMEMBASSY SEOUL
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6975
INFO RUEHBJ/AMEMBASSY BEIJING 0395
RUEHMO/AMEMBASSY MOSCOW 7218
RUEHKO/AMEMBASSY TOKYO 0479
RUEHUM/AMEMBASSY ULAANBAATAR 1143
RHMFISS/COMUSKOREA J5 SEOUL KOR
RHHMUNA/CDR USPACOM HONOLULU HI
RHMFISS/COMUSKOREA J2 SEOUL KOR
RHMFIUU/COMUSKOREA SCJS SEOUL KOR
RHEHNSC/NSC WASHDC
UNCLAS SEOUL 001031 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
NSC FOR CHA 
 
C O R R E C T E D  C O P Y  - PARA 1 AND 2 CORR'D 
 
 
E.O. 12958: N/A 
TAGS: PREL ECON EAID KN KS
SUBJECT: RECENT TRENDS IN PRC-DPRK ECONOMIC RELATIONS AND 
IMPLICATIONS FOR INTER-KOREAN COOPERATION 
 
 
SUMMARY 
------- 
 
1.  (SBU) Chinese economic ties with North Korea have 
expanded greatly in the past two years.  Although the ROKG 
welcomes the stabilizing effect that Chinese trade and 
investment brings to the DPRK, it is alarmed at the 
PRC's growing influence, to the point that ROK officials 
now routinely assert Beijing is attempting to turn 
North Korea into the "fourth province of Northeast 
China."  In the worst case, Seoul fears Beijing will 
turn the DPRK into a client state and the ROK will 
lose forever the opportunity to reunify the Korean peninsula. 
 Accordingly, as Chinese influence in the DPRK 
continues to grow, the ROK will feel increasing 
pressure to undertake a dramatic expansion of its own 
engagement with the North.  END SUMMARY. 
 
CHINA REMAINS DPRK'S BIGGEST TRADING PARTNER 
-------------------------------------------- 
 
2.  (U) According to the Korea International Trade 
Association (KITA), trade between North Korea and China in 
2005 hit a new high of USD 1.58 billion.  As a result, the 
PRC continues to be the DPRK's biggest trading partner and, 
according to preliminary figures, is likely to account for 
over 50 percent of North Korea's overall trade in 2005. 
 
 (NOTE: Because most of the data on DPRK trade is based on 
mirror statistics collected by the Korea Trade & Investment 
Promotion Agency, exact annual figures on DPRK overall trade 
are usually not available until July of the following year. 
END NOTE.) 
 
North Korea's trade with China is increasingly unbalanced, 
however, as its trade deficit with China nearly tripled in 
2005, from USD 212 million in 2004 to USD 588 million. 
Imports rose 36 percent and exports dropped 14.3 percent 
during the same period. 
 
HUGE GROWTH IN INVESTMENT IN TWO-YEAR PERIOD 
-------------------------------------------- 
 
3.  (U) Chinese investment in North Korea has also 
increased dramatically in the past two years.  Chinese 
investments, generally in the form of joint ventures, are 
mostly channeled to finance various resource and 
infrastructure projects in the North.  In return, investors 
(most of whom are based in China's three northeastern 
provinces) are guaranteed special rights to use resources 
and ports for a certain period of time.  The Ministry of 
Unification (MOU) estimates that PRC investment in 2005 
doubled from USD 50 million in 2004 to a total of USD 100 
million, accounting for approximately 85 percent of all 
DPRK in-bound investment.  The surge in Chinese direct 
investment is even more pronounced when comparing the 
2004 and 2005 figures with the 2003 figure of only USD 1.1 
million. 
 
FOOD AND ENERGY ASSISTANCE 
-------------------------- 
 
4.  (U) China remains one of the primary sources of food 
and energy assistance to the DPRK.  According to estimates 
provided to poloff by the Ministry of Unification (MOU), 
the PRC is the source of approximately 60 percent of the 
DPRK's total energy imports (both commercial and non- 
commercial).  The MOU also estimates that China gave a 
substantial amount of energy and technical assistance to 
the North in the form of long-term loans between 2001 and 
2005.  China has tried to reduce the financial burden of 
its bilateral relationship with the DPRK by substituting 
trade and investment for assistance.  The chronic trade 
deficit that the North has with the PRC, however, suggests 
that a large portion of bilateral trade is 'de facto' aid. 
 
JAPANESE TRADE DECLINES, CHINA FILLS THE VOID 
--------------------------------------------- 
 
5.  (U) The sharp increase in PRC-DPRK trade is in 
contrast to the result of a steady decline in the 
DPRKs trade with Japan as mounting political tension 
surrounding the nuclear and abductee issues has cut 
into bilateral economic ties. 
 
According to KITA, the level of Japan-DPRK trade declined 
from USD 1.3 billion in 2001 to USD 195 million in 2005 (an 
annual average decline of 32 percent), the lowest since 
1977.  Japan's share (17.8 percent) of North Korea's 
overall trade in 2001 was even greater than that of South 
Korea (15.1 percent), making it the second largest trading 
partner to the DPRK after China (27.6 percent); by 2004, 
however, Japan had fallen to fourth place with a mere 7.1 
percent share in the DPRK's overall trade, behind China 
(39.0 percent), the ROK (19.6 percent), and Thailand (9.3 
percent). 
 
6.  (U) At the same time, the recent decline in 
international aid has led Pyongyang to depend more on 
imported food and energy.  In fact, food and energy 
comprise the top import items in the DPRKs trade with its 
major trading partners, especially China and Russia. 
 
PRC SEEKS STABILITY, INFLUENCE AND TWO-KOREA STATUS QUO 
--------------------------------------------- ---------- 
 
7.  (U) South Korean analysts see China's increasing 
economic engagement in North Korea as reflecting Beijing's 
strategic interests in: (1) preventing a North Korean 
collapse, which could in turn have a destabilizing effect 
on its own domestic security; (2) maintaining Chinese 
influence on the Korean peninsula, and thus check U.S. 
influence in the region; and (3) sustaining the two-Korea 
status quo.  For the PRC, North Korea could be a major 
source for raw materials.  At the same time, North Korea 
remains an ever-increasing market for Chinese goods.  Based 
on these economic advantages, some analysts point to the 
possibility of China incorporating the DPRK into its 
development plans for its three northeastern provinces 
(Jilin, Liaoning and Heilongjiang). 
 
8.  (U) South Korean analysts also see North Korea 
seeking to increase its economic relations with 
the PRC to balance the growing economic leverage of 
the ROK (which is still considered a serious threat 
to the Kim Jong-il regime).  The DPRK's interest in 
developing its backward economy has also played a role 
in cultivating Chinese economic involvement in the DPRK. 
 
USD 2 BILLION IN CREDITS? 
------------------------- 
 
9.  (U) Meanwhile, PRC-DPRK economic ties were also given a 
major boost by high-ranking political and economic 
exchanges.  In particular, various bilateral institutional 
agreements to promote bilateral investment, and economic & 
technological cooperation were adopted during DPRK Premier 
Pak Pong-jus visit to China in May 2005 and President Hu 
Jintaos October 2005 visit to the DPRK.  Media reports 
indicate that the "Economic and Technological Cooperation 
Agreement" adopted during Hu's visit is worth USD 2 billion 
in trade credits and investment. 
 
 
 
DEPENDENCY ON CHINA MORE OBVIOUS "IN THE STREETS" 
--------------------------------------------- ---- 
 
10.  (SBU) According to a recent report by Dr. Cho Myung- 
chul of the Korea Institute for International Economic 
Policy (KIEP), the PRC's expanding economic relationship 
with the DPRK has not yet resulted in the North's 
structural dependence on the Chinese economy.  Nevertheless, 
Cho's report emphasizes that North Korea's poorly developed 
manufacturing industry puts it at a disadvantage in its 
trade with the PRC.  As a result, Chinese goods have become 
major import items for the DPRK.  Moreover, large volumes 
of Chinese goods are entering the DPRK through Dandong and 
have become popular on the DPRK black market.  According to 
media reports and Cho's in-depth interviews of North Korean 
refugees, as much as 80 percent of consumer goods found in 
the country's markets are Chinese products.  The DPRK's 
economy also depends heavily on China in other areas, such 
as transportation and finance.  In short, Cho's report 
shows that DPRK economic dependence on the PRC is even more 
evident at the "street level" than at the national level. 
 
 
IMPLICATIONS FOR INTER-KOREAN COOPERATION 
----------------------------------------- 
 
11.  (SBU) In a March 17 meeting with poloff, Cho said the 
ROK needed to begin preparing for China's growing economic 
influence over the DPRK, as it would not only complicate 
the ROK's plans for inter-Korean economic cooperation, but 
also undermine South Korea's plans to reunify the Korean 
peninsula under democratic and market-oriented principles. 
ROKG officials routinely express concern about China's 
increasing economic influence in the DPRK.  These officials 
say that China's increasing economic influence on the DPRK 
will naturally lead to more Chinese political influence in 
DPRK affairs.  At worst, ROKG officials fear that the DPRK 
could be incorporated into the PRC as a "fourth 
northeastern province."  Another scenario being 
discussed in Seoul describes the North Korean elite 
'running' to the PRC for help in the event of a DPRK 
collapse, which will in turn provide the pretext for direct 
PRC involvement in North Korean affairs. 
VERSHBOW