North Korea: Trade, Opportunity And Russia

Rajin Port, North Korea, 2011. Photo credit: Laika ac. Licenced under Creative Commons.

EVEN WITH UN trade sanctions against North Korea in place, China’s trade with North Korea rose 15% in the first five months of this year to just over $2 billion, according to customs data.

China is certainly buying less from North Korea, principally because it suspended coal purchases in February in response to North Korea’s fifth nuclear test in defiance of UN demands. However, it is still importing iron ore.

In the other direction, more Chinese oil (up 18% year-on-year) and goods, notably telephone equipment, textiles, soybean oil and vehicles, are flowing into North Korea.

The first-quarter data, which show a 37.4% rise in total trade, has drawn the predictable irascible tweet from US President Donald Trump, whose administration is showing signs of increasing frustration with Beijing’s attempts to be cooperative in reining in Pyongyang’s nuclear weapons ambitions.

The debate is intensifying in Washington over how honest an ‘honest broker’ Beijing is over North Korea. Is it, too, as frustrated with Pyongyang as its public statements suggest? Or is it less than neutral, still supporting Kim Jong-un’s regime to greater or lesser extent.

The darker conspiracists in Washington believe Beijing is ‘running’ North Korea with the end of keeping the peninsula on the brink of instability to keep US regional allies diverted from China issues while making China, as North Korea’s only ally and main aid donor, the essential partner in any brokered solution that never comes.

This Bystander thinks that a conspiracy theory too far, not least because subcontracting the maintenance of managed instability to the agency of the Kim dynasty seems such a high risk.

More likely, to our mind, China is protecting its red-line position. Beijing does not want the Pyongyang regime to collapse for fear of the outcome being a US-aligned unified Korea on its border, over which an influx of North Korean refugees, possibly starving, will already have poured.

Thus it will lean on Kim, but not heavily enough to topple him. This leaves the United States squeezed between taking direct action — which is everyone’s last resort, though one that Trump may resort to more readily than others — and imposing further sanctions, most likely next targeted at more banks and companies, including Chinese companies, thought to be financing North Korean trade, especially illicit trade.

Remittances by North Koreans working abroad are another potential target. A UN report in 2015 estimated that there were more than 50,000 North Koreans working abroad in mining, logging, textile and construction industries around the world, generating  $2.3 billion a year for the regime.

Which is one of the points where Russia enters the picture. Along with China, Russia is the main employer of North Korean workers. Thirty thousand North Koreans are estimated to work there.

Earlier this month, the Russian ambassador to the UN rejected the United States’ call for new sanctions against North Korea following its latest missile test. Instead, though it supported previous UN sanctions, it repeated China’s calls for restraint on all sides, similarly worried about the risk of instability that could be triggered by a strict sanctions regime.

Washington views the Russian position on North Korea, which is suspects to be opportunistic, sceptically, and as a sanctions busting. Last month, it imposed sanctions on two Russian companies, one for allegedly supplying a North Korean firm involved in the nuclear programme, the other for shipping petroleum products to North Korea.

Russia’s trade with North Korea is minimal: total trade last year was worth $77 million. That is a deceptive figure because much of the trade goes via China. Up to $500 million would be more realistic.

Still relatively tiny (and nothing compared to what it was in Soviet days). However, it jumped in the first quarter of this year, by 85% year-on-year, according to Russia’s customs service. The bulk of this consisted of Russian exports of coal ($26.7 million-worth) and oil ($1.2 million-worth).

Often forgotten, there is a railway that runs from the Russian side of the short Russia-North Korea border across the Tumen river to Rajin (seen above in a 2011 photograph), a North Korean port from which Siberian coal is shipped. New port facilities had been built in a joint venture with the South Koreans until they pulled out last year.

Sanctions-busting fuel deliveries to compensate for those lost from China also get through to North Korea clandestinely via this route. North Korean coal reportedly goes in the opposite direction. The line has four rails to accommodate both Russian and Korean gauge rolling stock.

However, the recent spike in Russian exports goes against the trend of falling exports over the previous three years, a trend mirrored by China, as it happens.

Last week, during President Xi Jinping’s visit to Moscow, he and his Russian counterpart President Vladimir Putin said the two countries would co-operate to defuse the North Korean crisis. Russia will not undercut Beijing’s leadership on the issue, but it is steadily inserting itself into the equation and is likely to be opportunistic, adding a further layer of complexity and uncertainty to an already seemingly intractable situation.

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Filed under China-Koreas, China-Russia, Trade

It Is Rocket Science

China’s second Long March-5 rocket lifts off from the Wenchang Space Launch Center, Hainan on July 2. Photo credit: Xinhua

WE DO NOT yet know — and may not for some time — what was the ‘anomaly’ that caused the failure seemingly some 10 minutes after take-off of the new Long March-5 rocket launched on July 2.

Beyond the obvious national embarrassment of any such space programme failure, this particular one is damaging to China’s space programme. How damaging will not be clear until it is known whether the failure lay in the Long March-5 launch vehicle or its Dongfanghong-5 (DFH-5) satellite propulsion system payload.

This was only the second flight of the Long March-5, intended as the first of a family of work-horse heavy-lift launch vehicles for the forthcoming lunar and Mars space programmes that will frame China’s civil and military space programme for the next few decades. The rocket can lift twice the payload of any other Chinese rocket and is on a par with the most powerful launchers the Americans have.

The DFH-5 satellite propulsion system is similarly leading edge in its use of new technologies. It and intended to put the next generation of large geostationary telecoms and earth observation satellites in orbit and control them once there. This one was attached to the new (and heavy) experimental Shijian-18 communications satellite.

Such satellites could be used for a variety of communications services from internet connectivity to aeronautical services, distance learning and telemedicine, all of which will be of used for China’s planned high-tech civil and military development.

Unusually, the launch was covered live on TV. Although coverage ended abruptly and without explanation, authorities were, at least, spared the embarrassment of a catastrophic failure while the rocket was still visible to the cameras. However, it was a powerful reminder that space flight is dangerous, difficult and complex. It is rocket science.

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Another Tragic Landslide

Rescue workers at the landslide site in Xinmo village, Maoxian county, Sichuan province, June 24, 2017It is a tragically familiar story. Heavy rains trigger a landslide in mountainous terrain leaving scores dead or missing presumed dead.

Its latest iteration is in Maoxian county in Sichuan, a three hours drive north of Chengdu. Fifteen are known to have died, but more than 120 are missing. The early-morning landslide buried 62 homes in Xinmo village, a tourist stop-off, blocked 2 kilometres of the river running through it and buried 1,600 meters of road, impeding rescue efforts.

Half the village was destroyed by the disaster. Only three people were rescued alive. According to state media, the village had been relocated to its present location in 1976 because its previous one was considered too landslide prone.

State media is full of exhortations from top leadership of all-out-rescue efforts and photographs as above of rescue workers in their readily recognisable orange kit and heavy earth moving machinery at the disaster site.

With it being the start of the flood season and the national weather observatory saying more heavy rain expected across the country in the next few days, national authorities have raised their geological disaster alert to the second highest.

Update: As of Monday, officials said 93 people were still unaccounted for. Fifteen residents thought to be missing were found to have been away from the area. The confirmed death toll was put at ten.

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Too Innovative To Be True

Traffic-straddling busTHE GIANT TRAFFIC-STRADDLING bus that caught this Bystander’s somewhat skeptical eye last year (see above) has gone the way of many an idea that was too innovative for its own good. Nowhere.

Technical and financial shortcomings seem to have done for it, according to press reports. Latest reports say the test track is being dismantled.

Last year, shortly after the (very) short test run of a prototype Transit Elevated Bus (TEB) in Qinhuangdao, the Beijing News reported that the main investment promotor for it was Huaying Kailai, an asset management company blacklisted in 2015 for conducting illegal finance activities. The Global Times said the firm, part of the Huaying Land Group, also ran a peer-to-peer financing scheme that promised high returns but risked running out of cash.

Claims of cooperation agreements between the bus’s maker, TEB Technology Development, and municipal governments appear to have been as spurious as purported orders from three countries in Latin America.

Update: Police have arrested 32 people in connection with the failure of the TEB, including the CEO of TEB and founder of Huaying Kailai Asset Management, Bai Zhiming, and 31 Huaying Kailai employees.

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China Invests Abroad

CHINA IS NOW the second largest investing economy. This reflects Beijing’s ‘Go Global’ policy that delivered a surge of cross-border M&A purchases in manufacturing and services by Chinese firms last year while individuals stepped up their purchases of real estate in developed countries. Chinese firms accounted for 8% of inbound cross-border M&A in the United States last year, worth a record $29 billion.

But China is also the world’s third favourite destination for foreign direct investment (FDI) after the United States and the United Kingdom. According to the UN Conference on Trade and Development (Unctad)’s newly released World Investment Report, 2017, China had FDI inflows of $134 billion last year. That was 1% down on the previous year, mostly because of lower inflows into the financial sector.

However, Unctad notes that:

In non-financial sectors, [China] recorded 27,900 new foreign-invested enterprises (FIEs) in 2016, including 840 with investments above $100 million. In addition, 450 existing FIEs significantly expanded their businesses, undertaking additional investment above $100 million. Non-financial services continued to underpin new FDI, with inflows in the sector growing by 8% while foreign investment into manufacturing continued to shift to higher value added production. In March 2017, for example, Boeing started to build an assembly facility in China, the first such project outside the United States.

Inflows via Hong Kong fell much more sharply, from $174 billion to $108 billion over the same period, though 2015 was an exceptional year and 2016 represented something of a return to trend.

China’s outflows increased to $183 billion in last year from $128 billion in 2015. Those via Hong Kong slowed slightly, from $72 billion to $68 billion.

The Unctad report identifies state-owned multinationals as major players in global FDI. China is home to the most — 257 or 18% of the total, way ahead of second-ranked Malaysia (5%). In 2016, the report notes, greenfield investments announced by state-owned multinationals accounted for 11% of the global total, up from 8% in 2010.

The investments of China’s state-owned multinationals “are instrumental in the country’s outward FDI expansion strategy”, Unctad says. It notes that generally the investments of state-owned multinationals tend to be weighted more heavily in financial services and natural resources than those of multinationals as a whole.

Seven of the 10 largest financial state-owned multinationals are headquartered in China, as are four of the 25 largest non-financial ones — China National Offshore Oil Corp. (CNOOC), China COSCO Shipping Corp., China MinMetals Corp. and China State Construction Engineering Corp. (CSCSC).

China remained the largest investor economy in the least developed economies, far ahead of France and the United States, and showed more interest than most in investing in transition economies, and particularly landlocked ones like Kazakhstan and Ethiopia, though the sums remain relatively small. However, state-owned oil firm Sinopec acquired the local assets of Russian oil company Lukoil for $1.1 billion.

A future focus of China’s investment will be via its One Belt One Road (OBOR) initiative. Beijing has already signed around 50 OBOR-related agreements with other nations, covering six international economic corridors. FDI to Pakistan, for example, rose by 56% year-on-year last year, pulled by China’s rising investment in infrastructure related to the China-Pakistan Economic Corridor, one of the most advanced OBOR initiatives.

Unctad notes:

Stretching from China to Europe, One Belt One Road is by no means a homogenous investment destination. However, investment dynamism has built up rapidly over the past two years, as more and more financial resources are mobilized, including FDI.

A number of countries located along the major economic corridors have started to attract a significant amount of FDI flows from China as a result of their active participation in the initiative.

Central Asia, unsurprisingly, is at the leading edge of this. The implementation of OBOR is generating more FDI from China in industries other than natural resources and diversifying the economies of various host countries.

Chinese companies already own a large part of the FDI stock in extractive industries in countries such as Kazakhstan and Turkmenistan. The ongoing planning of new Chinese investments in the region, however, has focused on building infrastructure facilities and enhancing industrial capacities. In addition, agriculture and related businesses are targeted. For example, Chinese companies are in negotiation with local partners to invest $1.9 billion in Kazakh agriculture, including one project that would relocate tomato processing plants from China.

South Asia benefits from the development of the China-Pakistan Economic Corridor.

This has resulted in a large amount of foreign investment in infrastructure industries, especially electricity generation and transport. For instance, Power Construction Corporation (China) and Al-Mirqab Capital (Qatar) have started to jointly invest in a power plant at Port Qasim, the second largest port in Pakistan. In addition, the State Power Investment Corporation (China) and the local Hub Power Company have initiated the construction of a $2 billion coal-fired plant.

OBOR also stretches to North Africa. Indeed, it seems decreasingly to recognise any geographic limits to its ambition and scope.

Egypt has signed a memorandum of understanding with China, which includes $15 billion in Chinese investment, related to Egypt’s involvement in the initiative. It is undertaking a number of cooperative projects under the One Belt One Road framework, including the establishment of an economic area in the Suez Canal Zone and investments in maritime and land transport facilities.

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OECD Sees China’s Economy Stabilising But Reform Still Needed

THE OECD QUIETLY prides itself on being the grown-up economic forecaster, eschewing the flash and razzmatazz of the International Monetary Fund or the World Bank for an understated mix of solid economic analysis and policy prescription.

The chapter on China in its latest Economic Outlook fits the bill to a tee: a sparse summary of an economy that is stabilising thanks to earlier policy support, but still needing structural reform if ‘rebalancing’ is to be advanced.

GDP growth for this year is forecast to be one-tenth of a percentage point above the official target of 6.5% and the same below in 2018 — ‘holding up’ despite considerable excess capacity remaining in the industrial sector. Consumption remains robust supported by housing-related purchases, e-commerce and overseas tourism.

While infrastructure investment is being sustained, monetary policy is tightening in response to the risk of financial instability, particularly via the shadow banking sector, and other risks that are mounting. Fiscal policy remains expansionary, however. The headline fiscal deficit will be held at 3% of GDP this year and next, the OECD reckons, but policy lending to prop up growth will also slow the rate of rebalancing.

That will also be slowed by the lack of reform, for example to the social safety net, that is diverting monies that individuals could spend on domestic consumption to precautionary savings. Longer term, the OECD says, corporate deleveraging and working off excess capacity “will be crucial to avoid a sharp slowdown in the future.”

It also quietly but firmly makes the point that longer the debt problem is left unaddressed, the larger it will get, and, by implication, the harder it will be to deal with it.

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China Looks At Semi-Submersible Warships

Illustration of concept models of semi-submersible arsenal ships

THE ‘ARSENAL SHIP’ is a 20-year old idea proposed by the US Navy. At base, they are a mobile floating platform for launching large numbers of missiles at sea, large being in the hundreds. A putative price tag of $450 million caused the US Congress to knock the idea on the head in 1998 when it scrapped funding.

Popular Science magazine is now saying that the PLA-Navy has taken up the idea, and with a twist. Its ideas for arsenal ships would let them slip beneath the waves better to evade detection.

It sounds like the stuff of science fiction, but plans have been seen of a couple of concepts for large scale warship-cum-submarines with flat hulls and steering fins that would let them at least semi-submerge as well as hydroplane when on the surface. One illustrative example is seen above. Wuhan City has been claiming some props for the research being done locally.

An arsenal ship would naturally fall into a carrier battle group, relying on the aircraft carrier’s fighters to protect it from air threats while providing the battle group with hundreds of extra missile launchers.

The magazine says:

Chinese research institutes have been testing sub-models of both arsenal ship configurations since 2011, including open-water tests for the hydroplane arsenal ship and laboratory tests for the arsenal submarine. Unverified rumours on the Chinese internet claim that a full-scale, proof-of-concept is under construction at Bohai Shipbuilding Heavy Industrial Corporation, to be launched after 2020.

There would be considerable technical challenges to overcome with an arsenal ship, especially one of the size China envisages. Not least, will be making it strong enough to contend with the stresses it would encounter underwater. Semi-submersible warships that have been built to date are small, torpedo-boat sized.

It would also need to be able to travel fast enough to keep up with a carrier group, which would make the hydroplane option the more likely.

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