Ripping Off Foreigners II: China Edition

October 24, 2012 7:00 AM

Yesterday, my colleague Marc Noland outlined some shenanigans at Kaesong; today, the Chinese variant.

In August, we provided an overview of the Xiyang investment dispute. More information is now leaking out, as a result of a translation of a Chinese piece by the SinoNK team of Adam Cathcart and Roger Cavazos and reporting by Jane Perlez at the New York Times. Other large-scale investors may also be getting cold feet precisely as the regime appears intent on tapping more Chinese FDI. Chosun Ilbo has broken the story that Chinese partners have pulled out of the Musan mine, by all accounts the largest North Korean mining operation.

The very appearance of the Chinese story is of interest in and of itself, as it shows a willingness of the press—and the propaganda department--to allow these grievances to air. The Chinese piece is entitled “Legal Entanglements of Xiyang Group’s North Korea Project Not Yet at an End,” [见习记者况娟上海报道, “西洋集团朝鲜项目纠纷未息] and appeared in the Global Times, October 12, 2012.  The story suggests that the North Koreans—through a branch of the Glorious China Bank [朝鲜华丽银行北京办事处]—had attempted to reach a settlement to compensate Xiyang for 30 million euros of losses.  However the DPRK Ryongbong Company Chairman Ri Song-gyu called the Xiyang president Zhou Furen to clarify that the settlement on offer was 30 Million dollars.  It could be reporters getting it wrong, but if not it means either that the North Korean bank did not know the difference between euros and dollars or that the negotiations were being gamed. Needless to say, no compensation was ever forthcoming.

Perlez managed to interview Wu Xisheng, the deputy general manager of Xiyang. Wu confirmed that this was a classic hold-up story. The mine opened in April 2011 and began to separate commercially valuable ores from others. After four months, the North Koreans were comfortable with the technology and began to put pressure on the contract. No information was provided on how the North Koreans marketed the ore, but Wu suggested that the price wedge between Chinese and North Korean productions costs was large: ($60 a ton in China vs. $30 a ton in North Korea). That is no doubt more than enough to attract opportunistic purchasers.

Another tidbit. The 700 North Korean workers at the mine were supposed to be fed by the government. But most days the men were too weak to work after just two hours, forcing the Chinese to stop work and dole out rice.

Perlez reports on another case in which the Chinese government intervened to stop a deal from going south. In 2007, the Wanxiang Group signed a partnership to develop a large copper mine, known as the Hyesan Youth copper mine. Two years later, the North Korean partner effectively expropriated the investment but the chairman of Wanxiang convinced Wen Jiabao himself to pressure the North Koreans on behalf of the firm. This time around, the Global Times reports a classically innocuous Foreign Ministry statement that suggests the Chinese government is not going to do much on Xiyang’s behalf (“PRC Foreign Ministry spokesman Hong Lei stated that, regarding Chinese enterprises, ‘China has always supported the DPRK and efforts to invest and contribute to the economic and trade cooperation between China and the DPRK. We hope that the two sides will properly handle problems emerging in the process of cooperation of enterprises in both countries.’” Translation: “you are on your own.”)

Xiyang is not the only case of Chinese firms getting shafted. Reports such as Chosun Ilbo’s on the Musan mine broke last week as well. Musan was a three-way venture between Tianchi Industry and Trade, a private trading company based in Yanbian, Tonghua Iron and Steel, a Chinese state-run iron and steel mill, and [North] Korea Ferrous Metals Export and Import Corporation launched in 2005; the deal supposedly gave the company 50-year rights to the mine. Tianchi extracted 1 to 1.5 million tons of iron ore at Musan every year, which it supplied to its own smelter in Jilin and to Tonghua and other companies. In the face of plummeting iron ore prices, the North Koreans sought a 20 percent price increase. According to Tianchi, they were barely making money at the previous prices. We don’t know how the contract was written, but the willingness of the North Koreans to allow major Chinese players like Xiyang and Tianchi to walk is not good.

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Stephan Haggard Senior Research Staff

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