January 17, 2006

China and North Korea mix business and politics

By Chris Buckley

BEIJING (Reuters) - North Korean leader Kim Jong-il was likely meeting top Chinese leaders in Beijing on Tuesday and by touring China's unabashedly commercial south he signalled hopes of enriching communist ties with business, analysts said.

Kim's very presence in China is unconfirmed, but many reports -- including in Hong Kong papers controlled by the mainland -- say he spent recent days peering under the hood of China's trade juggernaut in southern Guangdong province, looking for lessons and maybe deals.

While there, Kim reportedly visited a university campus, the state-of-the-art Yantian port and Huawei Technologies, one of China's ambitious high-tech exporters. He is also said to have stayed in Shenzhen, the commercial zone Marxists once reviled as a Trojan Horse for creeping capitalism.

"I think North Korea's understanding of China's economic reforms is changing and deepening, and this trip may be an important part of that," said Xu Wenji, an expert on Chinese-North Korean economic ties at Jilin University in northeastern China.

The South Korean Chosun Ilbo newspaper said Kim was due to meet Chinese President Hu Jintao in Beijing on Tuesday to discuss stalled six-party talks on the reclusive country's nuclear programme. South Korea's Yonhap news agency said 40 sedans were seen pulling into the Diaoyutai state guesthouse.

The talks, involving North and South Korea, the United States, China, Japan and Russia, made progress late last year when Pyongyang agreed in principle to dismantle its atomic weapons programmes in exchange for aid and security guarantees.

The six were meant to meet again at the start of this year, but North Korea has threatened a boycott because of a U.S. crackdown on its finances. The last round took place in November.

Between China and the North, politics is never far away, and both sides also have strategic reasons for expanding trade, observers said.

STABILITY "CRUCIAL"

"South Korea is also very interested in expanding economic relations with North Korea, but the North doesn't want to lose leverage and become too dependent on them, so China helps the balance," said Xu.

Beijing also wants to prevent North Korea from economic collapse, because that would probably speed unification with South Korea -- a U.S. ally.

While North Korean trade is dwarfed by South Korea's $100 billion trade with China in 2005, Beijing "gives more importance to North Korea because they think the stability of the neighbouring North is crucial," said Dong Young-seung, who studies North Korea at the Samsung Economic Research Institute in Seoul.

In October 2004, when Hu visited Pyongyang, Kim praised China's economic growth, and Hu indicated he wanted to wean North Korea from one-way economic aid and expand commerce.

"Let's promote economic and trade cooperation and encourage shared development," Hu told Kim, according to the official Xinhua News Agency. The two leaders also toured a Chinese-funded glass factory.

In the past two years economic flows between China and North Korea have leapt. In the first 11 months of 2005, official trade between the two sides reached $1.45 billion, a rise of 23.1 percent on a year earlier, according to Chinese customs figures.

But much of China's exports of small goods and electronics across the border is under-reported, China experts say.

In 2004, China invested $50 million in North Korea, and in 2005 that figure may reach $90 million, with China accounting for about 85 percent of the North's inbound investment, according to Andrei Lankov, an expert on the North at the Australian National University.

Chinese Web sites devoted to North Korea advertise dozens of partnerships for coal and iron ore mines, factories, and food processors. Recently, the two sides also signed an agreement to jointly develop undersea gas reserves, setting aside a long-running boundary dispute.

While Kim may want to learn more about China's economy, it is unlikely he wants to emulate China's rapid economic liberalisation, said Xu.

Even if the North was not restricted by U.S.-led trade sanctions, its rigid rulers remain committed to reviving, rather than jettisoning, economic planning.

Kim and his advisers are looking for ways to bring prosperity without sacrificing control, Xu said.

"North Korea is also crossing the river by groping stones," he said, echoing the late Chinese leader Deng Xiaoping's metaphor for China's reforms. "But it does not want to end up in the same place."

(Additional reporting by Lee Jin-joo and Jon Herskovitz in Seoul)

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