Confucianism and Trade Imbalances

The enlightened dictatorship of money

Chinese company ‘Shanghaied’ in North Korea

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I ran into this little tidbit today (h/t Sinocism), which was so amazing that I had to blog about it.  I can’t find the (long) company press release in English, so I will go ahead and translate it.

I have to say, even though this is clearly expropriation, I don’t really have that much sympathy for Xiyang.  Even in China, some foreign investors in China’s energy sector have ended up in jail for violations of “state secrets” laws . Did they really think North Korea would have a friendlier environment for foreign investment than their home country? Note below that they said a tax on the order of 25% wiped out all of their profits.  Was a profit margin less than 25%, as healthy as that might be in other contexts, really worth the political risks here?


Xiyang Group’s North Korea Investing Nightmare

It wasn’t that Xiyang Group was stupid, as much as that North Korea’s tricks were too clever.  Xiyang’s investment in North Korea, the Yangfeng joint venture project, is presently China’s biggest investment project in North Korea.  In the more than four years from 2007 to September 2011, 240 million RMB (more than 30 million Euros) of investments went towards building a modern mining field that produced 500,000 tons of pure iron powder a year, as well as 210 buildings for accompanying living facilities for North Korean workers.

On April 25, 2011, the mine which produced 500,000 tons of pure iron powder a year went into production.  After all of  Xiyang’s hard work, in order to open the mine smoothly, it sent 100 technical specialists to North Korea.  Upon opening, it produced the highest quality iron powder (iron content exceeding 67%, silicon content less than 3%, low sulfur, and low phosphorus). After three months of personal instruction, North Korean workers understood the technology, and produced more than 30,000 tons of iron powder.

On September 6, 2011, the Korean side suddenly put forward 16 points in complete contradiction to the contract.  They tore up the contract, so the joint venture could not continue working.

The following are the main points:

  1. A natural resources fee equal to 4-10% of sales price.
  2. A land lease fee of 1 euro per square meter per year
  3. An industrial water use, 0.14 euro per cubic meter.In the contract, there was no natural resource fee or land lease fee, because the Korean side gave a 12 million euro discount for mining its resources and investing in the land, and that included natural resources and land use fees.  The contract also said that water would be free.
  4. An electric fee of 0.5 Euro per Kwh.  (The contract stipulates an electricity fee of 0.33 RMB/Kwh.)
  5. The Korean workers should receive the same pay as the Chinese workers for the same work.  The contract said that the Korean workers would make at least 30 USD a month; the joint venture paid 300 RMB a month.
  6. The washing plant’s industrial wastewater cannot enter the sea, even if it is clear water.  With this condition, the Korean side effectively stopped production.
  7. The most serious condition is that iron powder could not be sold.
  8. They repeatedly stressed that the DPRK is a legal person, and that they had the final say (the contract’s terms are managed by the Chinese side)…

The reasons the Korean side suddenly tore up the contract:

Wengjin Iron Mine is a huge underdeveloped resource, with 1.7 billion tons of reserves, and it’s low-grade ore, with an average iron content around 14%.  Low grade ore is a worldwide technological problem.  Because of North Korea’s closed system, they didn’t want to let Xiyang take large samples back to China for testing, so Xiyang had to rely on experience and rules of thumb, at great risk to its investment.

According to North Korea’s investment policy on natural resources and their social conditions, Xiyang could not invest there.  In order to entice Xiyang to go there and invest, they used deception and begging, so the conditions in the contract were very advantageous.  In 2009, after North Korea prohibited foreign investment, the Korean side, on behalf of the Permanent Committee of the Supreme People’s Assembly, immediately issued “Document No. 53” guaranteeing that Xiyang’s contract wouldn’t be modified for 30 years.  Now that they’re kicking Xiyang out, is this not trampling on the authority of their highest body?

After more than four years of difficult investment from 2007 to September 2011, and after having overcome many serious difficulties, Xiyang finally started production on April 25, 2011.  After more than 3 months of production, it produced 30,000 tons of pure iron powder.  This ensured that the technology used by Xiyang was completely correct and reliable.  The Wengjin experimental industrial model had shown results.

On October 18, 2011, Wang Cong Rong, secretary of the Chinese Embassy in the DPRK, and Hong Nanji, Director of the Investment Committee of the Korean joint venture, met for almost 12 hours in Pyongyang with no substantial progress.

On Febuary 7, 2012, the Korean side unilaterally terminated the contract, and  issued Document 58 of  the Korea Investment Committee canceling  Xifeng Joint Venture Social Enterprise’s founding certificate.

On February 29, 2012, the DPRK began to use violent tactics towards remaining workers on the Chinese side, cutting off water, electricity, and communications, breaking windows, and depriving them of their rights to go out.

On March 2, 2012, at 2:00 in the morning, Ling Feng cooperative Vice Secretary Jin Hualong led more than 20 armed police and security officers to break in Chinese residences, forcibly collecting the deeply sleeping workers together to announce “the closure of the Xifeng Joint Venture is on central orders,” fully proving that the problem is not only corporate behavior, but a change in national behavior.   We had to leave immediately, and they treated us as enemies, escorting the 10 remaining workers to buses taking them to Siniju and back to China.  They stole and occupied the entire Xiyang joint venture zone.  Xiyang Group’s investment in North Korea was like a nightmare; North Korea was the lion’s den, and in the end we just wanted to get out alive.

Xiyang Group is one of China’s 500 strongest companies, headquartered in Haicheng, Liaoning province.

In 2005, after the government’s call to ‘go out,’ we looked at North Korea. We had heard that North Koreans had a bad reputation, that the country’s laws were inadequate, and that it was easy to get ripped off. During this phase, we were quite cautious, so we waited until 2007 to sign the contract. With the approval of China’s Ministry of Commerce, Xiyang Group and Ling Feng Cooperative Group started North Korea Yang Feng Joint Venture.

Ling Feng’s contact person on the Korean side was Li Chengkui, and he was the main culprit for deceiving Xiyang.  A big schemer and big liar, always with ulterior motives, he used flowery language to cheat us.  The following are examples of how he cheated us:

  1. Ownership shares.  In 2006, when the two sides were discussing shares, Xiyang wanted a 75% stake.  The rules on the Korean side related to foreign investment in natural resources at the time were that they had to own at least 30%; in order to deceive Xiyang, Li violated the rules and Xiyang signed a contract as proposed. In order to gain Xiyang’s trust, Li forged an approval certificate from the government.  After Xiyang entered North Korea to make the actual investment, Li again deceived us by saying, “North Korea cannot approve an investment share less than 30%.  The previous approval certificate is invalid, so you need a new one.  I can make up the 5% difference through dividends from Ling Feng.”  At that point Xiyang had still not caught on the scam, so we were taken in. Only on September 6, 2011, when Li took off his mask, and his face as a scammer was unveiled, did Xiyang realize they had been taken in. At present, the ownership shares specified in the contract are Korea 25%, China 75%.In the North Korean government approval number 96-108 (February 14, 2007), the shares were Korea 25%, China 75%.  The document issuing authority is the Korean Economic Coordination and Guidance Bureau.In the North Korean government approval number 96-015 (November 27, 2007), the shares were Korea 30%, China 70%. The document issuing authority is the Korean Foreign Affairs Ministry; this is the best evidence of deception.
  2. Urging Xiyang to start production as soon as possible.  According to international practice, pre-production acceptance time is 72 hours. Li didn’t tell Xiyang to stop production after the 72 hour pilot, nor did he say that the products from the 72 hour period could not be sold, but rather every day urged Xiyang to produce more sooner.  Our shipping port is Korea Haeju Port, which can only accept a cargo ship of 5,000 tons. After  producing 5,000 tons of iron powder, Xiyang reminded Li to take care of the shipping formalities.  Instead, Li shirked the export procedures but told Xiyang to send the material to Haeju, creating the impression that it was ready to be sent abroad.  It was only when the Korean side  ripped up the contract on September 6, 2011 and announced that the iron powder could not be sold that Xiyang realized they had been deceived and stopped production, with great economic loss.
  3. In North Korea’s current system, the various departments that handle foreign affairs are a secret.  Foreigners can’t just go to the relevant departments. When Xiyang signed the contract with Li in 2006, there was a clear division of labor.  Problems relating to the North Korean side were all handled by Li.  The 4th article of the agreement signed in Pyongyang on October 10, 2009 clearly stipulated that “Ling Feng would apply for state approval of waste ponds.”It wasn’t until the September 6, 2011 meeting that it was revealed that since the Korean side hadn’t reported the ponds, let alone constructed them, there was no way they could have applied. His goal was to prevent Xiyang from producing in North Korea and to send Xiyang out.
  4. At the end of 2008 the Korean government modified its foreign investment policy, changing natural resource investment from an encouraged class to a restricted type of investment. Natural resource taxes rose to 25%, depending on corporate costing.  Continued investment would realize no profit.

Only after one year of real manipulation did we understand the nightmare of North Korea’s investing environment. No public electricity, public water, roads, or communications. Their closed policies mean that many of the simplest problems became huge ordeals.  Two examples:

  1. Chinese people on site need to go out and buy food. This is an extremely simple problem: just take money and go out and buy it. North Korean regulations prohibit foreigners from going out on the street and buying food, however. At the Chinese side’s repeated urging, a new rule finally emerged, but they would need to be accompanied by two Koreans, arranged by their security department (if two people weren’t available, then it wouldn’t work; this was a very common occurrence, and it seriously interrupted the work of the joint venture.)  Otherwise, they could only go to the vegetable market 60 km from the site.
  2. Chinese workers were forced to remain within a restricted area of just 2 square km. The beach was just 500 m away, but they were prohibited from going there while off duty. There were rules for  travel: for instance, the joint venture was 200 km from Pyongyang.  Even if there was a closer way, we could only take the route outlined by our Korean minders.

Secrets of Li Chengkui’s corrupt lifestyle:

The work unit on the North Korean side cooperating with China was Ling Feng Cooperative, with Li as its representative. He has a fat head, big ears, and a nice potbelly, weighing 108 kg – the fattest person in North Korea! Everybody knows that North Korea is having problems with food. Normal people can’t fill their stomachs, so the North Korean figure is quite lean. The only way to have a fat head and big ears like that is to have a very luxurious lifestyle. He asks China for everything: money, things, food, drink, women. After he returns home money isn’t enough; after going to China once they want the lifestyle.

Xiyang records show that besides spending 30 million euros in North Korea over four years, costs for corrupt officials reached 800,000 USD.

  1. In June 2007 Li came to China, and thought that the smooth operation of the joint venture required giving the various government departments 200,000 RMB in the name of Xiyang.
  2. In 2008 Li bought an American Hummer Jeep and asked Xiyang for 80,000 USD.
  3. In 2009 Li asked for 100,000 USD in order to assist South Hwanghae province in construction.
  4. In 2010 Li asked for 70,000 USD in the name of building workers’ housing in North Korea.
  5. Whenever Li brought a North Korean delegation to visit Xiyang, he wanted between for most people 10,000 euros, or for some people 20,000 RMB, plus a more than 10,000 euro high-end suit, each person no less than 40 cigarettes, laptops, cell phones, clothing, daily necessities, food, fruits, etc. to take back home.
  6. After arriving in China these Korean officials forget everything. Every day they want to drink four tons of alcohol; every meal must have baijiu; each hotel room must have at least 10 bottles of beer; every day they get drunk and find a lady masseuse.  Sometimes when the Chinese side doesn’t help them find a masseuse, they find one themselves and put the charge on the room. Every time a North Korean delegation comes to visit Xiyang, everything from costs of the trip over to the room, food,  daily transportation, tourism, mistress expenses, and the return trip are all covered. Each delegation costs no less than 200,000 RMB. On top of all of that, Xiyang also has to think about  invoices for the  hotel and food costs so that when they return home they can get reimbursed for these business expenses.
  7. When Chinese people go to North Korea they must cover every expense; foreign rules state that all foreigners must eat at special restaurants and stay at special hotels.  North Korea arranges two people to accompany the delegation 24 hours a day, and they collect all food, drink, and hotel  expenses to bill to the Chinese account. These are the good North Koreans; a more serious situation is if they tack other household expenses on to the bill. On June 24, 2008, settling the bill at the Yanggakdo Hotel, it was discovered that the amount was much too high. Upon asking the staff, it turned out that Li had taken 20 cases of beer home from the hotel. When we spoke to the North Koreans, they said you Chinese have plenty of money, and if you don’t like that it will come from Yang Feng joint venture’s future profits. [note: we see how that went anyway…] We didn’t know whether to laugh or cry; all we could do was to say not to do that again.
  8. In 2011 Xiyang’s Chairman Zhou invited Li to his house, where again he was met by pleas for 2,000 USD.

Written by Maofucious

August 11, 2012 at 6:30 PM

2 Responses

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  1. […] We have received some communication on our recent story on the closing of the Taepung Group and the larger question of whether investment reform is coming. But one response was such a juicy must-read that it is deserving of a post on its own: David Stinson’s translation of a tell-all blog post from a Chinese company about its failed investment in North Kore… […]

  2. […] KCNA this week hit back at Xiyang Group’s widely-publicised criticism of its treatment at the hands of the DPRK authorities while pursuing a joint venture in the North. […]

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