North Korean economy surrenders to Chinese and US currency invasion

North Koreans shun own currency in favour of US dollars and yuan

PUBLISHED : Monday, 03 June, 2013, 3:41pm
UPDATED : Monday, 03 June, 2013, 3:48pm

Chinese currency and US dollars are being used more widely than ever in North Korea instead of the country’s own money, a stark illustration of the extent to which the leadership under Kim Jong-un has lost control over the economy.

The use of dollars and Chinese yuan, or renminbi, has accelerated since a disastrous revaluation of the North Korean won in 2009 wiped out the savings of millions of people, said experts on the country, defectors and Chinese border traders.

On the black market the won has shed more than 99 per cent of its value against the dollar since the revaluation, according to exchange rates tracked by Daily NK, a Seoul-based news and information website about North Korea.

North Korea is one of the most closed countries in the world, so it is difficult to determine what impact this could ultimately have on Kim’s regime.

But experts said the growing use of foreign currency is making it increasingly difficult for Pyongyang to implement economic policy, resulting in the creation of a private economy outside the reach of the state that only draconian measures could rein in.

For now Pyongyang appeared to be capitulating, rather than trying to stamp out foreign currency use, they said.

Estimates of how much hard currency is in circulation vary, but an analyst at the Samsung Economic Research Institute in Seoul put it at $2 billion in an April study, out of an economy worth $21.5 billion, according to some assessments. Pyongyang doesn’t publish economic data.

The use of dollars and yuan is now so pervasive there is little Pyongyang can do about it, said Marcus Noland, a North Korea expert at the Peterson Institute for International Economics in Washington.

The government would increasingly have to force people to provide goods and services to the state and get paid in won, added Noland, who closely studies the North Korean economy.

“It’s been a tug of war for 20 years where the state would like to get control of the economy, to quash the market and to get everyone to use the North Korean won, but it just doesn’t have the capacity to do any of those things,” he said.

“It just makes it harder and harder for them to govern. Nobody wants what they’re selling.”

In the Chinese town of Changbai in Jilin province, just across the border from the hardscrabble North Korean city of Hyesan, one Chinese trader said North Korean officials he dealt with wanted yuan more than anything else, even food.

The yuan they earned from doing business quickly gets circulated into Hyesan, a city of roughly 190,000 people whose industry-based economy has slumped since the 1990s.

“The only thing they want is foreign currency,” said the trader, who sells products including medicine and tea in Changbai. He declined to be identified because he did not want to jeopardise his business or endanger his North Korean partners.

In April, Daily NK posted video it said was shot secretly in February at an open-air market in Hyesan. The shaky footage showed vendors openly quoting prices in yuan for products like gloves and jackets, and one accepting payment in yuan.

Pyongyang has waged periodic campaigns to try to stop the use of foreign currency but with no success.

North Korea made circulating foreign currency a crime punishable by death in September last year, the Paris-based International Federation for Human Rights said in a report last month.

Another group, Human Rights Watch, recently interviewed more than 90 defectors who had fled North Korea in the past two years about punishment they had received for economic crimes. None said they were penalised for using or holding hard currency.

Nevertheless, ordinary North Koreans are very careful.

“I have heard multiple stories of people hiding foreign money under the floorboards in the house, or burying it up the hill in the woods out back,” said one person in northeastern China who has lived in Pyongyang and regularly interacts with North Koreans.

“Nobody puts it in the bank because nobody trusts the government.”

Faith in the North Korean won crumbled when Kim’s father, Kim Jong-il, ordered the sudden revaluation of the currency in November 2009.

The government chopped two zeroes off banknotes and limited the amount of old money that could be exchanged for new cash. The move, seen as an attack on private market activity at the time, spurred a rush to hold hard currency.

Without foreign exchange, the economy would stop functioning
Dong Yong-Sueng

It also quickened inflation and according to South Korea’s spy agency, sparked rare civil unrest in one of the world’s most entrenched authoritarian states after North Koreans realised the won was not a safe store of value.

The government is widely believed to have executed the economic official who oversaw the revaluation.

Dollars have circulated in North Korea for decades, partly because of the cash siphoned off from official foreign trade.

The rise in the use of yuan is a more recent phenomenon and reflects a surge in trade and smuggling between North Korea and China along their 1,400 km (875 mile) land border, where a lot of the currency changes hands. Official trade with China is worth $6 billion annually.

Black market rates illustrate how far the won has fallen since the revaluation. It has plunged from 30 to one US dollar to about 8,500, according to exchange rates tracked by Daily NK. The current official exchange rate is about 130 won per dollar.

Daily NK has sources in North Korea who report every fortnight on rates in Hyesan, the city of Sinuiju opposite the Chinese border city of Dandong and also the capital Pyongyang.

In border areas some 90 per cent of transactions occur in hard currency, said Christopher Green, Daily NK’s manager of international affairs. Elsewhere, foreign cash accounts for 50 to 80 per cent transactions in private markets, he estimated.

North Koreans increasingly did not refer to prices in won, Dong Yong-Sueng, senior fellow at the Samsung Economic Research Institute in Seoul, wrote in the April study on the use of foreign currency in the country.

Prices were marked in US dollars for beer, university preparation courses and apartments, Dong wrote.

South Korea’s central bank estimated foreign currency in circulation at $1 billion in 2000. Dong reckoned $2 billion in foreign cash was now sloshing around the economy. Around half was in US dollars, 40 per cent in yuan and 10 per cent in euros, he told Reuters.

Dollars seeped into the market because trading firms exploited government quotas for exports and imports, making profits when prices diverged from those set by the state, Dong said.

It was not possible to estimate the amount of North Korean won in circulation, Dong added.

He said the North Korean informal economy was now bigger than the formal, state-led economy.

“Without foreign exchange, the economy would stop functioning,” Dong said.

US officials have previously accused North Korea of making extremely high-quality counterfeit $100 notes. This money is believed to have been used to raise real cash for the regime abroad rather than get cycled into the economy.