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Cash & credit squeeze hits China-North Korea trade

One of the more maddening tropes I see in reporters’ coverage is a question that’s usually presented as dispositive to the success of sanctions: “Will China cooperate?” For reasons I’ve already explained and don’t have time to repeat today, I always answer that question by asking what the questioner means by “China.” The point being: yes, it would be nice if Xi Jinping finally came around to the rising risk that Kim Jong-un will bring war, instability, disrepute, and bankruptcy to China, but he hasn’t. He hates us more and fears us less than he hates and fears Kim Jong-un, and I strongly doubt that we’ve brought him close to that tipping point.

What matters more is whether the Chinese banks that hold North Korean accounts, and the Chinese businesses that deal with North Korea and also use the financial system that runs through New York, have developed a healthy fear of the Treasury Department. For some very good reasons, yes, I think the banks have and the businesses are starting to. Consequently, we continue to see reports from the China-North Korea border that some of the divergent interests we lump together into a million-person jiaozi we call “China” are indeed cooperating.

Is this mainly because of (a) Chinese government action to enforce sanctions, (b) fear of public or legal exposure by Chinese exporters that use North Korean labor or materials, or (c) the fact that both parties are having difficulty finding finance for North Korea-linked transactions? I can’t say for certain, and I suspect that (a), (b), and (c) are all factors to different degrees, but I’m going with (c). Why? First, because that’s consistent with reports I compiled in September, going back over the preceding weeks, that banks in China were freezing or closing North Korean accounts. Second, because we continue to see reports like this one.

The trader in the Chinese border city of Dandong has seen business all but dry up, and he spends his days scrambling to obtain payment from the suddenly broke North Korean state companies to whom he sold on credit.

“They have no money to pay us in cash, and the worst is that because of sanctions they can’t settle the bill with goods such as coal, as they did in the past,” said Yu, reached by telephone at the offices of his Dandong Gaoli Trading Company.

Yu said he’s owed about $1 million in all for deliveries of toothpaste, instant noodles and other household items. He’s trying to avoid laying off staff by continuing to export foodstuffs such as pine nuts and red beans. “If they become unemployed, it would be bad for both the state and society.”

Yu’s plight appears increasingly commonplace across Dandong, where the bulk of the cross-border trade is handled. Interviews with four trading companies and recent media reports indicate Chinese companies are hurting in a city where North Korean trucks used to rumble across the Yalu River bridge several times a week delivering metal scrap and returning with everything from televisions to toilet bowls.

The owner of another firm, Dandong Baoquan Commerce and Trade Co., which used to import iron ore and coal and export basic consumer goods, said he was owed around $200,000 by his North Korea clients.

“I had to lay off about 10 staffers, but I had no other choice because it was the government policy,” Han Lixin said, referring to the sanctions. “I’m still in business hoping to trade with other countries, but it takes a lot of time and efforts to develop customers.” [AP]

See also this report, indicating that the root cause of the trade slump is that the North Korean traders are suddenly broke; this report that North Korean traders can’t pay their debts to their Chinese partners; and this report on the slowing of trade in Rason. North Korean workers also continue to leave China, including its fishing industry. The Chinese businesses are now backfilling their production lines with Chinese workers.

In the interest of balance, and to give some very cautious credit where it’s due, there have also been some reports that the Chinese government has ordered North Korean businesses to close down. Adam Cathcart also points to a Chinese-language report of a corruption crackdown in the border region (I can’t read Chinese, so I’ll take his word for that). On the other hand, this report by the Financial Times tells us that sanctioned North Korean entities, including Minzheng International Trading, continue to operate freely in Hong Kong. Other reports confirm that China’s flagrant cheating on shipping and coal import sanctions continues (see here, here, here, and here).

An October report that the elites in Pyongyang were being deprived of rations has not been backed up by other reporting since then, and I’d add that rations almost certainly make up a very small portion of what the Pyongyang elites live on.

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My suspicion has long been that China tends to crack down on North Korean money laundering either (1) to make good headlines until we lose interest and quietly go back to business as usual, or (2) to claim credit for, and conceal our influence on, trends that occur for other reasons, such as market fears of secondary sanctions. There are still not enough such reports for me to feel confident that this is an across-the-board trend that will endure, but it has certainly introduced both uncertainty and additional cost into any supply chain that begins in North Korea.

Overall, the news encourages us that if the administration continues to accelerate its enforcement efforts, they will present Kim Jong-un with the difficult choice to disarm or lose the confidence of his crocodiles. There is still much more that we haven’t done, and there is no time to lose in doing it.

Finally, an interpretive advisory for journalists: when you read Ambassador Haley’s threat to “take the oil situation into our own hands,” rather than immediately jump to alarmist conclusions and spread panic, consider a much more likely possibility – that Haley may be threatening that the U.S. will freeze and/or forfeit the assets of shippers, merchants, and refineries that deal with North Korea (see, e.g., the Treasury Department’s designation of Velmur and its corporate officers, and the Justice Department’s recent forfeiture suit against its funds). I have mixed feelings about oil sanctions, frankly, and will probably do a post on that at some point, but every policy decision is a balance of risks against threats, and I need not tell you that the threat is rising.

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Update: This interview with a resident of Pyongyang from mid-November, however, indicates that sanctions weren’t having much of an effect there. Yet.