North Korea’s neighbours and investors eye opportunities in Asia’s ‘pre-frontier market’
Anthony Rowley says the possibility of inter-Korean peace isn’t all that’s exciting observers, as companies in the Asia-Pacific eye mineral extraction and infrastructure building, while investors see a potentially massive upside. However, rampant corruption, lack of rule of law and previous failed ventures in markets like Myanmar loom large
North Korea might seem the last place anyone would want to do business – a “hermit” nation born out of conflict and ruled for decades by a ruthless dynasty, a country with dilapidated physical infrastructure, lacking the rule of law and contact with most of the outside world.
Even though its current leader, Kim Jong-un, has appeared to extend the hand of friendship to the United States and promised to get rid of nuclear weapons (thereby removing the imminent threat of conflict and conflagration), the risks of doing business with North Korea would appear prohibitive.
And yet, the lure of investing in the future of what William Thomson (a former US Treasury and Asian Development Bank official who now acts as an investment manager in Hong Kong and elsewhere) calls a “pre-frontier market” is proving strong among the more brave-hearted and farsighted.
There is a long way to go yet before it can be said with confidence that “peace has broken out” on the Korean peninsula. But the degree of interest generated in economic and financial circles since the Singapore summit between US President Donald Trump and Kim suggests gathering momentum.
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At the business level, things are beginning to move, from South Korea where business giants like Hyundai, Lotte Corp and others have set up task forces to look into potential business opportunities in North Korea, to the Korea-Chinese border where commerce, traffic and trade are picking up.
Among portfolio investors, too, North Korea is stirring interest. Jim Rogers, a Singapore-based veteran investor who co-founded the Quantum Fund with fellow billionaire George Soros, is looking to invest in stocks with North Korea exposure via their operations in South Korea, China and elsewhere.
North Korea's vast stocks of metallic and other minerals as well as “rare-earth elements” (valuable in multiple hi-tech applications) are of interest to commodity investors globally, from people like Rogers to Australian mining companies (even though United Nations sanctions forbid exports for now).
Emerging market veteran Mark Mobius says “there is no question that a reunion of North and South Korea would open up incredible opportunities” and Jesper Koll, head of the hedge fund Wisdom Tree, Japan, believes that “as North Korea emerges from decades of isolation, an enormous potential investment opportunity is about to unfold”.
Given that Korea is a nation where the phrase “one country, two systems” has a meaning not seen elsewhere since the days of the former East and West Germany, political reunion is likely to take decades rather than years, even assuming that the process of rapprochement stays on track.
But economic reunification or at least “connectivity” appears to be a different matter. South Korea President Moon Jae-in offered Kim a preview of what a modernised North Korean economy with top-quality infrastructure might look like when the two leaders met on the South Korean side of the demilitarised zone in April.
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The Tokyo-based Asian Development Bank Institute has similar ideas. Any development plan for North Korea should focus on“infrastructure connectivity” to link it with Northeast Asia and form corridors of development within the region, the ADBI’s Naoyuki Yoshino suggests.
This makes sense to investors like Mobius, too. “The possibility of rail and road routes going from South Korea along the east and west coasts of North Korea, one leading to China and one to Russia, would open up big opportunities to boost economic development in North Korea”, he suggests. “Such infrastructure would of course be needed to tap North Korea's metallic minerals, along with oil and gas reserves.”
There are, as Rogers notes, people exploring possibilities, including engineering studies conducted by Japanese entities, while countries rich in natural resources like Australia are “starting to explore what to do and how to do it”. South Korean companies, he said, have put together a task force examining mineral mining prospects in North Korea.
Enthusiasm for North Korea is not universal. Some see it as a “graveyard” for business joint ventures. A major deterrent is corruption and a breakdown in the rule of law, they argue. Others, like investment manager Robert Lloyd George, say investment in frontier markets like Myanmar has made them cautious.
But Kim’s pursuit of economic modernisation could result in a better deal for foreign investors, beginning with South-North Korea ventures. Hyundai is looking at inter-Korean economic cooperation projects and preparing for the reopening of the jointly run Kaesong industrial zone in North Korea.
Given its proximity to North Korea and its associations with Korea in general, Japan might be seen as an obvious source of investment and modern technology, especially in infrastructure building and mining. As Jesper Koll says, “Japan, for one, has the wherewithal to benefit from this, if only its political relations with Pyongyang can be strengthened.”
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs