Why North Korea is set to become the next big thing for investors

To modernise North Korea’s economy, outside aid and investment – a great deal of it – will be needed from governments, multilateral agencies and private investors.

PUBLISHED : Saturday, 16 June, 2018, 10:58pm
UPDATED : Saturday, 16 June, 2018, 11:45pm

Will North Korea become the next big thing for investors now that the Donald Trump and Kim Jong-un summit has ended with handshakes and a “walkabout” (rather than a walkout) by the two leaders?

The question is not premature, even if denuclearisation of the Korean peninsula is some way off. The general verdict on the Singapore summit is that there is still a long way to go before we can say Trump’s “art of the deal” has paid off. But the economic and financial implications of the summit are more immediate.

Save a reversal of the Singapore agreement, Pyongyang and Seoul will emphasise economic and military matters. Kim has emphasised his desire to modernise North Korea’s economy, but he cannot afford to do so alone.

Nor will South Korea be able to pick up the tab in the same way West Germany did for East Germany when the two halves of the divided nation were reunified. Outside aid and investment – a great deal of it – will be needed from governments, multilateral agencies and private investors.

Besides South Korea, this will come from China, Japan and maybe the United States and Europe so far as official aid is concerned. Multilateral aid will flow in time. But the more intriguing question is how will private investment flow into the hermit kingdom?

How China is using North Korea in its long game against America

Fund managers, who always like to be ahead of the game, will initially approach investment in North Korea via an indirect route, i.e. by targeting stocks of companies that are likely to be doing more business with North Korea as the denuclearisation process begins to unwind.

Hyundai and other South Korean chaebol (industrial conglomerates) will likely attract fund manager interest in coming weeks. So too will Japanese giants like Mitsubishi or Komatsu, not to mention listed Chinese enterprises.

In the same way that North Korea’s economic development from here on is likely to reflect the Chinese model of foreign company-invested special zones, the evolution of portfolio investor exposure to the North could mirror the Chinese model of “A” and “B” shares quoted in Seoul.

There are myriad potential opportunities for outside investors. Apart from a vast need for new infrastructure in the form of transport, energy and communication networks, all of which suggest opportunities for foreign contractors and suppliers, North Korea is rich in minerals.

The country’s mountain ranges conceal not only nuclear testing sites but also, according to some estimates, minerals including gold, iron, copper, zinc, and graphite. Some of these stocks are said to be among the largest in the world, with a potential total value of up to US$10 trillion.

As it happens, that is perhaps around the same sum of money required to modernise North Korea’s economy and bring it level with that of South Korea. And exploiting this vast mineral wealth will obviously require foreign finance and technology.

As Jesper Koll, the head of investment house WisdomTree in Tokyo, has noted, “as North Korea prepares to emerge slowly but surely from decades of isolation, an enormous potential investment opportunity is about to unfold”.

Kim, the economy and what really brought North Korea to the table

But the reason North Koreans cannot turn to the South to pay for economic modernisation in the same way the West Germans were able to from their East German counterparts is a matter of scale, as Koll has pointed out.

East Germany’s modernisation required some US$2 trillion of public sector support and US$3 trillion of private sector investment, mainly from West Germany. That was doable in terms of the relative size of the two economies. North Korea could require up to US$10 trillion of investment – way beyond the ability of South Korea alone to provide.

However, it is by no means beyond the resources of China and Japan, acting together with South Korea, not to mention potential US and European investment.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs