North Korea Holds Chinese Firm Responsible for Failed Venture

North Korea held a Chinese mineral company responsible for the collapse of an iron-ore joint venture, escalating a dispute that risks undermining the isolated state’s relations with China, its biggest investor.

Xiyang Group, based in Liaoning in northeast China, fulfilled only 50 percent of what it had agreed to and was “chiefly to blame,” the official Korean Central News Agency said yesterday. Xiyang said last month that its contract was terminated at the plant after North Korea demanded an increase in royalties and rent.

The row may undermine North Korean leader Kim Jong Un’s effort to boost foreign investment in an economy in which 16 million people, or two thirds of the population, suffer from poverty and malnutrition. China accounts for 89 percent of North Korea’s foreign trade and the two countries are negotiating the expansion of joint economic zones with an eye on the reclusive state’s estimated $6 trillion of mineral reserves.

“North Korea doesn’t understand how capitalism works and believes that all companies operate under the government’s orders,” said Lee Woo Young, a professor at the University of North Korean Studies in Seoul. “The two countries are likely to turn this dispute into a diplomatic one to exercise leverage in negotiating Chinese investment in the joint economic zones.”

Mining exports are one of the few legitimate ways for North Korea to earn foreign currency. Last year, the regime exported $1.2 billion of minerals, 97 percent of which went to China, according to a June 1 report by the Korea Trade-Investment Promotion Agency in Seoul.

Signed Contract

Xiyang signed a contract in 2007 to build a mine producing 500,000 tons of iron ore per year, the company said on a weblog that was confirmed by Bloomberg News today. The company dispatched more than 100 technical workers to North Korea to set up the plant.

The North Korean side raised 16 issues in September last year which “completely went against the contract,” the company said, including raising royalties and equal pay for North Korean workers and Chinese workers. North Korea then terminated the contract on Feb. 7 and cancelled the joint venture company, cutting access to water, electricity and communications, Xiyang said.

“They chased us out after we invested,” Wu Xisheng, a deputy general manager in charge of Xiyang’s North Korea investment, said by telephone today from Beijing. “There’s nothing we can do. We can’t go back.”

North Korea agreed to pay compensation of $31.24 million to resolve the dispute that the company hasn’t received, forcing Xiyang to make a statement, Wu said.

Public Response

“North Koreans took Xiyang’s complaint as the Chinese government finding reasons to limit investment in the North,” said Lee, the professor in Seoul. “That is why they responded so publicly.”

North Korea’s government said it is working to improve the nation’s investment environment to “meet the demand of the developing times,” according to the KCNA report, which cited the DPRK Commission for Joint Venture and Investment.

North Korea has made little progress on an economic zone set up last year on the Yalu river islands of Hwanggumphyong and Wihwa on its border with China. An earlier zone to the east was established in the 1990s at Rajin-Sonbong, giving China’s landlocked provinces of Jilin and Heilongjiang access to the North’s Rajin port.

Jang Song Thaek, the uncle of North Korean leader Kim Jong Un, won a Chinese pledge during his visit last month to Beijing to “quickly start” development in Wihwa, the KCNA said on Aug. 15. Chinese Premier Wen Jiabao said two days later that the two countries will offer favorable land and tax policies to encourage companies to invest.

North Korea’s economy has been further strained in recent months by torrential rain and flooding. More than 179,000 tons of coal was washed away in July, and scores of mine pits inundated northeast of Pyongyang.

The United Nations said in June that about 16 million of North Korea’s 24 million people suffer from chronic food insecurity, high malnutrition rates, and deep-rooted economic challenges.

To contact the reporters on this story: Sangwon Yoon in Seoul at syoon32@bloomberg.net; Aipeng Soo in Beijing at asoo4@bloomberg.net

To contact the editor responsible for this story: John Brinsley at jbrinsley@bloomberg.net

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