A Kimdom awaits: China and South Korea get down to business
Investors are salivating at the prospects in North Korea, the region’s last frontier market. A handful of players are already seeing profits, but many risks lie ahead
In offices overlooking the Yalu River in Dandong, China, at a rural real estate agency just south of the inter-Korean DMZ, and among the glass and steel office towers of Seoul, anticipation – and hope – is rising of the potential dividends from warming ties with North Korea.
Some are excited by the opportunities to utilize North Korea’s cheap but skilled labor for anything from textile processing to software outsourcing. Dreams of upgrading inter-Korean rail and road connections and other infrastructure are a lure for others. And the country’s natural resources, from seafood to rare earths, represent opportunities for even others.
More broadly, the creeping marketization of North Korea’s economy over the last two decades has generated effective pricing and distribution mechanisms, while engendering a consumer culture. At the top of the food chain, the regime has promoted a number of high-profile public-private projects, ranging from ski resorts to water parks.
These factors make the nation the last true frontier market in booming Northeast Asia. But with North Korea also the most heavily sanctioned nation on earth, commercial opportunities are severely oppressed, while a dearth of corporate success stories illustrates the sheer level of risk in investment.
Even so, some smart and lucky players are already profiting as optimism blossoms in the wake of the nascent – and fragile – détente spreading across the peninsula.
China’s traditional entry point to the Korean peninsula is the city of Dandong, across the Yalu River from the North Korean city of Sinuiju. From there, direct road and rail links reach the capital, Pyongyang.
China’s gateway to Korea
Dandong is a bracing city. Gleaming modern apartment blocks line the river bank and downtown North Korea’s only international consumer brand, Daedonggang Beer, retails at the same price as Heineken.
Korean can be heard among service personnel in many city restaurants downtown, and in the various seafood-processing and textile factories on the edge of the city. A truncated bridge, bombed during the 1950-53 war, is a key stop on visitor itineraries, while motor boats speed curious tourists across the Yalu to peer into the mysterious Kimdom at close range.
Dandong’s relationship with North Korea is reflected in its real estate. Prices in the area around a new bridge over the Yalu have surged 30% in recent months, and in the city overall, have increased 10%, said Canadian expatriate and Dandong resident Michael Spavor. He cautions that the surge is a bounce – prices fell over the last two years as the sanctions bit deep – but says that business sentiment is taking flight.
“There has been a definite surge of interest among my North Korean partners in doing business across the border,” said Spavor, who runs consultancy Paektu Cultural Exchange, a firm involved with projects inside North Korea. “[And] I have been working with Chinese and Chinese-Korean investors, they are now very interested.”
Spavor takes business delegations to North Korea, where he matches Chinese investors with appropriate counterparts, ministries and the 27 special economic zones (SEZs), notably those at Rason and Wonsan, nationwide. Rason, in the country’s northeast, is perfectly placed for the tri-border (China-Korea-Russia) area; Chinese and Russian interests both operate wharves in the port. Wonsan, in the southeast, sits on a magnificent bay, and is seeing a construction surge as Pyongyang has prioritized it as a tourism hotspot.
Sectors of interest include tourism infrastructure and services, notably hotels and restaurants, Spavor said. Plant owners in southern China, as well as foreign companies in China, which are all struggling with rising labor costs, are also interested in North Korea’s cheaper wages.
“Chinese labor costs have gone up in the last few years, and companies are looking at places like Bangladesh, but [North Korea] – at least, in the business sense – is more like a different province of China than a different region of the world,” Spavor said. Just last month, he received enquiries from German, Canadian, British, Italian, Taiwanese, and Singaporean companies.
South Korean clients are also in contact, looking at “general trade items such as beer, soju, specialty foods and seafoods, natural resources and light industry,” Spavor said. Tourism is another focus.
“I think South Koreans have heard a lot about Wonsan,” he said. “It is probably a shorter flight from Seoul to the beach at Wonsan than to get to the beach in Jeju Island or Busan.” The latter are South Korean tourist destinations off the south coast and in the southeast of the peninsula.
Spavor will be guiding small parties to the annual trade expo in Rason this August, but is particularly bullish on Wonsan. “That SEZ is a top-down priority for Pyongyang, so there is a focus on its development,” he said. “Most projects are tourism-based – not heavy industry, not mining – which is an easier sector to open up.”
Despite a drop in Chinese investors over the last two years, activity in Rason is continuing. “The Koreans, on their own, have recently constructed a new brewery, a stadium, a trade fair and exhibition center and a children’s palace,” he said. “There is ongoing construction of malls, casinos and apartment buildings.”
Investors also hope to open up an east coast “corridor” from Mount Kumgang, the site of a Hyundai-built tourist resort inside North Korea, through to Wonsan, which would be marketed at visiting Japanese, Russian and South Korea cruise ships.
“In the last 18 years of being involved with [North Korea], this is the most optimistic I have ever been,” Spavor said. “Of course, it is dependent upon how talks with different countries go … [but] there is huge momentum now from China, the US, South Korea and Russia which will be hard to slow down.”
Property in the DMZ, finance in Seoul
South of the inter-Korean frontier, international summitry has already delivered a dividend to a handful of South Korean households.
In the quiet, hilly countryside of Paju, the county between Seoul and the DMZ, the three northernmost townships have seen property prices rise by 22%, 25% and 27% since the April inter-Korean summit, according to information released by Paju. Transaction numbers have also soared, from 48 in February to 173 in April.
The area is dotted with Seoulites’ weekend homes, sprinkled over old Korean War battlefields – testament to a growing belief that there is little likelihood of another North Korean invasion. At Geodon Real Estate Agency, a tiny office just south of the strategic Imjin River, Lee Byong-hui says his visitor numbers have shot up since the April summit.
Property prices in the Civilian Control Zone (the strip of land just south of the DMZ) have climbed. Still, land inside the 4-km-wide DMZ – which can be traded, but not developed, or even accessed by civilians – remains low, at KRW5,000-7,000 per pyong (3.3 square meters), compared with KRW70,000 per pyong in the CCZ. In US dollars, this equates to $5.50 to $7.70 a pyong in the DMZ, against $77.70 a pyong in the CCZ.
“Previously, we could not do deals at those prices,” said Lee, whose clients have predominantly been players rather than developers. “The people who buy are usually the well-to-do, who buy land as an investment. They will hold onto the investment for the long term.”
Thirty-five miles south, on the high-rise island of Yeouido in the Han River that is home to South Korea’s finance sector and is sometimes called “Seoul’s Manhattan,” the game is also afoot. According to a Financial Times report, North Korea-themed funds attracted about KRW27 billion (US$24 million) last month, accounting for nearly half of the inflows into South Korean equity funds.
Yeouido-based Hi Asset Management runs a “Tongil” (reunification) fund. Han Kang-hoon of Hi Asset’s Business Strategy Team has mapped out various scenarios under which business with North Korea could be conducted: economic cooperation, monetary union, economic development, democratization, economic integration and finally political integration – that is, reunification.
“Investment would be implemented at each level,” he told Asia Times. The fund buys into South Korean firms which would benefit if the above scenarios come to pass, notably in the light industry, fertilizer, foodstuffs, medical infrastructure and construction sectors. Companies investing include Asia Cement, Hyundai Glovis (a distributor), Doosan Infracore and Hyundai Construction, Han said.
“Most investors [in our fund] are from public funds, sold by banks and brokerages,” he said.
The exuberance has not reached foreign players: Hi’s fund has no overseas investors, Han said. Even so, some foreign investment banks are tentatively examining North Korea: Both Citigroup and UBS have published recent research on the country.
Despite the possibilities and intense interest, nothing is likely to proceed anytime soon. For South Koreans, there is the question of sanctions emplaced in 2010 following North Korea’s sinking of a South Korean ship and shelling of an island: no South Korean can legally conduct business across the DMZ. And South Korea and China are both required to implement UN Security Council sanctions.
Reality check: The risk landscape
Although China has been widely accused of flouting those sanctions in the past, it does appear to have been enforcing them as of last year. While Beijing or Moscow may call for the easing of sanctions, that would have to go to a vote in the Security Council, where the US wields a veto.
“The biggest obstacles [to business] are the presence of sanctions,” said Go Myong-hyun of Seoul’s Asan Institute. “The Americans have not lifted a single component of sanctions yet, and all areas of investment are sanctioned – anything that makes money is under sanctions.”
Historically, small players – Chinese-Koreans using North Koreans to finish detailed textile products, which are then exported worldwide under a “Made in China” mark; Europeans utilizing North Korean engineers to create software; traders bartering goods in SEZ markets – have enjoyed modest commercial success in North Korea.
“Chinese businesses that made money in North Korea did not have production sites inside the country,” Go said. “Those that make money are transactional companies.”
Major brands have no such record of success.
“If you are talking about foreign direct investment, as the Chinese and South Koreans are, all previous examples failed,” Go said. “And there is future uncertainty as to whether the court system will protect foreign investors. If you want to be the first mover and try out whether North Korea is ready to let you take money out, be my guest!”
One risk is political. Hyundai Asan, the South Korean firm established to create and operate the Kaesong Special Industrial Zone and the Mount Kumgang Tourist resort – both South Korean enterprises inside North Korea – has been in stasis since both projects were shuttered. Kaesong closed in 2016 due to inter-Korean tensions, while Mt Kumgang shut in 2008 after a South Korean tourist was shot dead by a North Korean soldier for wandering into a restricted area.
Another risk is financial: North Korea is desperately short of hard currency, and Egypt’s Orascom, which built North Korea’s mobile net, was famously unable to repatriate its profits in 2015.
Moreover, North Korea defaulted on US$770 million of loans to European banks in 1987. Efforts in 1994 to resolve the situation, including direct negotiations with Kim Il-sung, were unsuccessful. The state founder died that year, leaving the situation unresolved and North Korea, which does not issue bonds, was cut off by most global financial institutions.
A third risk is the lack of infrastructure, notably transport and electricity, which particularly impacts efforts to dig out resources like coal, gold and rare earths. “I want as far as helping this one [North Korea-focused] fund register in Ireland in the mid-1990s, but it was almost immediately defunct and ceased to exist,” said Hank Morris, a Seoul-based financial advisor. “It became clear that it was next to impossible to make any investments if you can’t have reasonable infrastructure.”
Go added: “I am sure [North Korea] has some mineral wealth, but what makes it profitable is what the exaction cost is, and whether you can you get it to a seaport. I sense this is why they have not been exploited; the challenge is not how much it is worth, but about the conditions for exploitation. That is a big ‘if’,” he added.
Back in Dandong, Spavor is undaunted. “I am aware sanctions have not been lifted, but there is a lot of optimism … the Chinese and North Koreans are very optimistic that these sanctions will be dropped, figuratively or legally, this year,” he said. “A lot of people are interested in getting their feet in the door first.”
But nobody in the gateway city can ignore one glaring reality. China built a brand new highway bridge across the Yalu in 2015, and to this day, it remains unconnected, south of the river, to the North Korean transport net. An apt metaphor for efforts to reconnect with the north.