Emerging Crisis? China's North Korea Dilemma

Trouble?

[Editor’s note: The following is a cross post by Heesun Wee that originally appeared on CNBC.com]:

North Korean leader Kim Jong Un's purge of senior leadership seems to be continuing, amid reports he ordered the deaths of relatives of his executed uncle. But in the midst of political tension, experts say the regime is moving forward on economic policies that increasingly are tied to neighboring China.

According to recently released figures, Chinese authorities granted 93,300 work visas to North Koreans in 2013—a roughly 17 percent gain from the prior year, NK News reported.

While Korea watchers warn against interpreting the data as North Korea opening up, the visas do emphasize "deepening" economic ties between the two countries, said Andray Abrahamian, an expert on the North Korean economy.

The China factor

North Korea was derailed by a devastating famine during the 1990s. Since then, the regime has subsisted—and even gained slightly, according to some estimates—with the help of Chinese subsidies and pockets of free enterprise.

China already provides the regime with financial support that amounts to a trade gap of about $1 billion a year. In other words since about 2008, North Korea imports about $1 billion more annually from China than it exports, said Bruce Bennett, senior defense analyst at the RAND Corp., a nonprofit research group. "So North Korea is running an unpayable debt to China—China is essentially subsidizing North Korea," Bennett said.

China is offsetting this trade gap in part by purchasing North Korean mineral rights and other North Korean resources. But the residual trade gap can be interpreted as Chinese foreign aid to North Korea, Bennett said.

Chinese leadership, above all else, wants stability in the region. Beyond triggering a refugee crisis, a sudden North Korea collapse would overwhelm the local economies. And that would be unwelcome for China, which already is reaching a key inflection point.

After decades of double-digit, export-fueled growth, signs point to a slower, more balanced expansion for the mainland. A survey last week suggested China's manufacturing activity dipped in January for the first time in six months. That helped spook the global markets last week, and sparked investor worries about the emerging economies, including China.

North Korea's 1 percent

The details about more Chinese work visas follow the execution in December of Jang Song Thaek, an uncle of North Korean ruler Kim. Jang was an effective bureaucrat, and had amassed and managed one of the largest and most influential groups of state trading companies in North Korea. Through his accumulated power, he nurtured a significant following—clearly a threat for Kim.

"Jang was like a prince maker,"said John Park, northeast Asia security specialist at the Harvard Kennedy School. "In North Korea, it's a parallel existence between the 1 percent and 99 percent. And Jang's execution was about managing the power of the 1 percent," Park told CNBC in December. "He built the North Korean equivalent of a North Korean business empire."

It's through a combination of revenue-generating state enterprises, managed by the political and military elite, and a black market that North Korea has managed to survive for some 60 years.

North Korean business ventures, meanwhile, are growing increasingly complex. And more visas granted by China last year is part of this free-enterprise momentum.

The 17 percent gain in visas granted is not particularly high given roughly 88 percent of North Korea's trade is with China, according to Abrahamian, also executive director of Choson Exchange, a Singapore-based nonprofit that trains North Koreans in business, economic policy and law.

The fact that a nonprofit even exists to train North Koreans may come as a revelation. But even an isolated, communist regime needs to interact and conduct trade outside its borders to generate cash.

"As business ventures become more established and complex, given the difficulties of communicating with North Koreans in-country, it makes sense that more and more would want to relocate to China, especially Dandong or Shenyang," Abrahamian said. Both Dandong or Shenyang are located in southeast China, near the border with North Korea.

In this Oct. 24, 2011 file photo released by China's Xinhua News Agency, visiting Chinese Premier Li Keqiang, left, meets with late North Korean leader Kim Jong Il, front right, in Pyongyang, North Korea.

'Back off to work'

After Jang's execution late last year, reports surfaced over the recent weekend that Jang's family also had been executed. Citing multiple sources, Yonhap News reported Jang'srelatives had been put to death at the North Korean leader's instruction.

Kim—believed to be in his early 30s, and a basketball fan—took control from his late father in 2011. Now amid a North Korean purge, the regime may be trying to send countervailing economic signals—including the flow of workers into China.

"Certainly, some businesspeople were recalled [from outside North Korea] ... then it was back off to work," Chosun Exchange's Abrahamian said. "It seems that the leadership understood that this was going to be a shock and realized that they had to send countering signals that things would proceed as before," he said.

Most of the visas granted to North Koreans by China likely were in trade, including light manufacturing, mining and food products, Abrahamian said. There likely are additional North Korean day laborers who work in China under cross-border provincial agreements, he added. The regime generates additional income through the Kaesong Industrial Complex, a key joint industrial region between the two Koreas that was reopened late last year.

Ironically, it's these incremental economic gains that may actually telegraph cracks in the North Korean government, Bennett writes in his recent book, "Preparing for the Possibility of a North Korean Collapse."

"According to one expert," Bennett writes, " 'revolutions do not happen when people are really desperate. Most revolutions have occurred at a time of steady improvement in political freedoms and living standards, as the recent Arab Spring has further proved.' "

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