China Boosts North Korean Export Zone

The Rajin-Sonbong Free Trade Zone in the extreme northeast corner of North Korea was always something of a joke. The zone was created in 1991 by the late North Korean dictator Kim Il-sung when the North was in one of its periodic flirtations with Chinese-style free markets. But nothing much came of it.

That may be changing as a Chinese state-run investment firm has signed a deal with Pyongyang to pump big money into the enclave to develop infrastructure, coal-fired power plants, oil refineries and other projects to help exploit the natural resources in this corner of the country.

The original zone was obviously modeled on China's pioneering free trade zones, in which certain communist export restrictions were relaxed in a bid to attract foreign investment. Its prime location, close to where the Chinese, Russian and North Korean borders come together, was assumed to be a draw.

It is also about as far away from Pyongyang as one can get in North Korea, thus keeping any capitalist contamination isolated in one remote corner of the country far from the rest of the population as one can get and still be in the Stalinist country.

In the two decades of its existence, Rajin-Sonbong has languished, neglected by the impoverished government in Pyongyang and generally ignored by potential foreign investors. Michael Rank of the British Guardian newspaper visited the site only last September and described it as being "desolate."

"The main square turns into a sea of mud when it rains . . . there are no street lights". The only connection with the nearest Chinese city is over a winding, mountainous gravel road, offering little incentive to turn the grubby little town (Rajin and Sonbong were merged into one city, renamed Rason) into an export entrepot.

The only real foreign investment that the zone ever attracted was a casino-hotel called the Emperor, funded by a Hong Kong gambling magnate and evidently designed to attract Chinese punters from the Northeast, who may not have the wherewithal to go to Macau.

The Emperor Hotel supposedly closed in 2005 in the aftermath of a scandal involving a senior Chinese cadre, who gambled away about 3 million yuan in public money, but the Guardian's reporter, visiting Rason in September, saw a couple dozen Chinese punters still playing in what must be the world's most forlorn gambling establishment.

There are multiple signs, however, that Pyongyang is getting serious about making something of Rason. One important sign of things to some was a personal visit a year ago by Kim Jong-il, the first time he had toured this remote corner of his bailiwick.

Possibly tied in to this was Kim's several visits last year to China, including the city of Dalian, Northeast China's main export portal. The Chinese would like to see Rason turned into a serious competitor for Chinese exports and imports because they are putting a strain on Dalian's facilities.

Shortly after Kim's tour, the local leadership was replaced with cadres with more experience in international trade, headed by no less than by a former minister of foreign trade, Rim Kyung-man, by far the senior most communist official to take charge of the zone and municipality.

There are reports too that work is finally getting underway to improve and pave the gravel highway that connects Rason and the Chinese border about 50 km away. It is assumed that the Chinese are paying for this and a new customs facility on the North Korean side of the border at the Tumen River.

Of course, the most significant sign came earlier this month when the Chinese state-run Shangdi Guanqun Investment Co. Ltd, signed a memorandum of understanding with Pyongyang's Investment and Development Group to invest US$2 billion in the zone to turn it into "the biggest industrial zone in Northeast Asia," as the MOU reportedly stated.

The project calls for basic infrastructure such as roads, modern piers, coal-fired electric power plants and oil refineries, using Rason as an export base for China, Japan and Southeast Asia. The first project apparently will be the coal plant plus ancillary roads, rail and piers.

Shangdi Guanqun Investment was founded in 1995as a government-owned trading arm specializing in oil processing, and natural resources development. An official was quoted in the South Korean press as saying that the company will build a plant to refine crude imported from the Middle East and Russia to sell to China and other customers.

The revival of investment interest the free trade zone appears to be one with other Chinese moves to help develop North Korea's abundant natural resources to feed its economy. North Korea has considerable amounts of coal, gold, iron ore, copper, zinc and other minerals which China needs to feed its economy and which it is actively helping develop.

The Rason zone is close by the huge Musan Iron ore mine, which is is said to have seven billion tons of iron ore reserves, making it potentially one of the world's largest iron mines. It has attracted Chinese interest as well as some other foreign investment such as India's Global Steel.

Russia reportedly has also invested some US$200 million equivalent in Rason, mainly in infrastructure. It would seem, however, that Russia has less interest in the zone as it already has ice-free major ports at nearby at Nadhodka and Vladivostok.

On the other hand, the Chinese Northeast is landlocked to the east and has to send its goods by rail and truck overland to the port of Dalian. Development of the Rason free trade zone would effectively give the Chinese an outlet on the Sea of Japan that they presently lack.

It is just another sign of China's growing economic ties with its neighbor. The two sides signed an economic cooperation treaty in Pyongyang on Nov. 23, the very day the north bombarded the South Korean island of Yeonpyeong. The value of two-way trade increased more than 30 percent in 2010.

The Chinese have long advised Pyongyang to embrace its market-oriented measures, including free trade zones, with the aim of improving North Korea economy and thus reducing the potential for instability. Until now Pyongyang's response has been half hearted at best –witness how Rason languished for so many years. It may be that now it is taking things to heart.