North Korea’s Current Account Deficit with China: Crisis Coming?
Recently, North Korea watchers have been scratching their heads over contradictory claims about how much China’s trade with North Korea has increased (or not). Are the differences a result of quoting the changes from quarter-to-quarter over year-on-year; quoting them in RMB vs. the dollar, or is the issue a result of some adjustments that Chinese customs appeared to have made with respect to commodity prices? My simple-minded take on this issue of the trade trends is contained in this first table, which when controlling for seasonality doesn’t appear to show anything that dramatic: a general upward trend from 2009 through 2013 and a general slowdown since.
But this hides the much more interesting question of what is happening to the bilateral trade deficit, which is shown in the second figure below. Here is my interpretation of how this unfolded in several stages:
- From 1995-2004, the bilateral trade deficit through the first half of the year was relatively constant, sometimes falling as low as $100 million and never getting much above $200 million.
- Then trade growth started to take off, as did North Korea’s bilateral deficits. My interpretation: the gap was financed in part by foreign direct investment, and perhaps by some gifts and support in the period leading up to the succession, with the Hu Jintao government going all in for engagement.
- After 2013, though, there is a distinct pulling back, probably reflecting new disaffection following the test of that year or a new policy course on the part of Xi Jinping.
- But look at the explosion of the deficit in the first half of 2017. This completely undercuts the dominant Chinese narrative, because while imports from North Korea may be contracting (read the coal ban), exports have preceded apace.
The real question is how such a whopping deficit is being financed. Here are some theories: others welcome in the comment section:
- China in fact is providing some of this financing to the government, either through official assistance or perhaps in the form of the accumulation of arrears at the company level. Over the last six months we have seen repeated stories of North Korean firms having problems making payments or simply stiffing their Chinese counterparts.
- A second theory is that the government is providing the financing for the trade deficit. We have no understanding whatsoever of how the North Korean central bank works, and it is doubtful that it is releasing reserves for the purpose of stabilizing the exchange rate and financing the current account deficit. But something akin to this process could be going on if the government is drawing down accounts held abroad in various jurisdictions to finance imports, which are needed to square the byungjin line guns and butter effort. While some of the weapons push is done through diversion of domestic resources to the program, I suspect that the development process is also pulling in imports.
- A third possibility is that since this data only captures visible merchandise trade, the deficit is misleading as the regime is relying more and more on invisible service transactions, such as its labor exports. In this case, the deficit in total as opposed to on the merchandise trade account could be substantially smaller and the financing needed to cover it correspondingly less. Again, there have been numerous stories about how North Korea is going full bore into labor exports (most recently with some harrowing stories about Russia).
Clearly, these are not mutually exclusive and it could be some mix of the three. But I will say it once again: things are fine until they are not, and when they are not, things can unravel quickly. I continue to believe that there is some possibility that Kim Jong-un is miscalculating his external financial position and that sanctions or just general political risk aversion could lead to an external financial crisis.
The indicators to watch: food and fuel prices (which would rise) and the black market exchange rate (which would depreciate). Keep your eyes on the NKNews fuel price tracker here and for the exchange rate and food, our friends at DailyNK market trends here. It is too soon to say that anything dramatic is afoot yet. But it is nonetheless interesting that the trends in food prices—although affected by the time of year—are moving in the predicted direction as is the black market dollar exchange rate, if ever so slightly.