Sept. 13 (Bloomberg) -- North Korean economic zones run jointly with the nation’s main ally, China, are wooing investors by promising low taxes and high returns as the totalitarian North seeks to salvage an impoverished economy.
An area at Rason city will become “North Korea’s Shenzhen,” Li Zichen, a deputy director of a zone management committee, told hundreds of people at an investment fair in Xiamen, China, on Sept. 9. Shenzhen led China’s rise to becoming the world’s biggest exporter. A second zone on the Yalu river is a “blessed land for investors to get rich,” said Zhang Zhiqian, also a deputy director.
The enthusiasm contrasts with frustrations highlighted last month when Chinese mineral company Xiyang Group said an iron-ore venture collapsed after North Korea violated a contract. Success in expanding the zones would help Kim Jong Un develop a nation that struggles to feed a population of 24 million amid international isolation stemming from its nuclear program.
“Any reasonable Chinese investor will think twice before putting money down,” said Da Zhigang, director of the Institute of Northeast Asian Studies at the Heilongjiang Academy of Social Sciences in the northeastern city of Harbin. “There are many stories on Chinese websites about losing money.”
North Korea and China operate two joint economic zones near their shared border, one at Rason and the other on the islands of Hwanggumphyong and Wihwa on the Yalu river. Rason was founded in the 1990s and the island zone was set up in June. Li and Zhang made their presentations at a conference organized by China’s Ministry of Commerce.
The southern export hub of Shenzhen was China’s first special economic zone, growing from a fishing village into a trade center after former leader Deng Xiaoping allowed foreign investment.
Xiyang Group was “chiefly to blame” for the failed iron-ore deal after it fulfilled only about half of its obligations, the official Korean Central News Agency said Sept. 5.
The Seoul-based Korea Trade-Investment Promotion Agency, which collects North Korea trade data, said on June 1 that North Korea’s dependence on China deepened in 2011 as exports of coal and other minerals to its main ally increased. China is North Korea’s main benefactor, accounting for 89 percent of the nation’s foreign trade.
China pledged increased support for trade between the countries after the uncle of North Korea’s leader, Jang Song Thaek, met Chinese Commerce Minister Chen Deming in Beijing last month. The two sides will “speed up infrastructure construction in the zones” to attract investment, China’s Commerce Ministry said in a statement at the time.
“Since the First Secretary Kim Jong Un came into office, the North Korean central government has proactively supported the zone and offered more flexible and pragmatic policies,” Li told the crowd at the investment fair, without providing specifics. Rason will become “an important international logistics center in Northeast Asia, a trade center, a tourism hotspot, a base of high-end manufacturing and a modern port city,” he said.
The Hwanggumphyong and Wihwa islands will focus on textiles, agriculture and software development, Zhang said. The area provides incentives including duty-free imports, an income tax rate of 14 percent and no visa requirement for entry, according to Zhang.
Joint management committees for the zones were established Aug. 14 during Jang’s visit last month, the Chinese Ministry of Commerce said in a statement on its website.
North Korea intends for the Wihwa and Hwanggumphyong islands to be developed into an industrial complex for Chinese companies, according to Cho Bong Hyun of the Seoul-based IBK Economic Research Institute. Rason is being developed into a hub for foreign trade and offers landlocked Chinese provinces in the region access to ports, Koh Yu Hwan, a professor of North Korean studies at Dongguk University in Seoul, has said.
About 16 million of North Korea’s 24 million people suffer from chronic food insecurity, high malnutrition rates, and deep-rooted economic challenges, Jerome Sauvage, the UN resident coordinator in Pyongyang, said in a June 12 statement.
Kim Jong Un oversaw the launching of a long-range rocket on April 13 that deepened the North Korea’s isolation. The U.S. canceled a February deal for 240,000 metric tons of food aid in exchange for a halt on nuclear weapons and missile tests, and the United Nations Security Council also widened existing sanctions.
To contact Bloomberg News staff for this story: Xin Zhou in Beijing at firstname.lastname@example.org
To contact the editor responsible for this story: Paul Panckhurst at email@example.com