By George Friedman

China has denied details from a South Korean media report over development projects in North Korea's Rajin-Sonbong Special Economic Zone, also known as the Rason Special Economic Zone. Beijing has long been involved in the region and has admitted that it is co-developing Rason with Pyongyang. While the details are unclear, China has reason to invest in Rason -- the port could help alleviate some of China's logistical problems. North Korea is eager to accept the investment because economic uncertainty during a time of transition could be catastrophic for the new regime.

The Chinese Foreign Ministry denied allegations made in a Feb. 16 South Korean media report regarding its agreement with North Korea to jointly develop the Rajin-Sonbong Special Economic Zone (SEZ), a port area in northeast North Korea commonly referred to as the Rason Special Economic Zone.

According to the Yonhap news agency, Beijing agreed in late 2011 to invest about 19 billion yuan ($3 billion) into Rason, for which it would receive the lease of three piers for 50 years. Under the agreement, Beijing would also build an airfield, a thermal power plant and a 55-kilometer (34-mile) railway track connecting Rason to Tumen, China. The Chinese Foreign Ministry claimed that the specific details of the report are untrue and that China and North Korea had agreed only in principle to develop the zone.

China has long exerted its economic influence in North Korea and has an interest in the strategically important Rason Special Economic Zone. Chinese involvement in Rason dates back to the 1990s, though Beijing increased its involvement considerably in 2005 when it secured the rights to one of the port's piers. Beijing has been particularly involved over the past few years. While the details of the deal remain unknown, it is clear that Beijing has arranged to help Pyongyang develop Rason, possibly by connecting the remote port to northwest China. Such a development would revitalize the zone -- to the benefit of both countries.

Importance of Rason

Rason's importance to China cannot be understated. An ice-free port located 500 nautical miles (approximately 925 kilometers) from Japan's Niigata port, Rason provides China's northeastern provinces access to the Sea of Japan, from which goods can be moved more effectively into and out of northern China than from ports farther south on China's east coast. In 2011, China moved 80,000 metric tons of coal through the facility in five shipments from January to September.

The port at Rason is large, totaling 380,000 square meters (more than 4 million square feet). Housing three operational piers, it has a capacity of 4 million metric tons, and with an additional pier under construction, its capacity could reach 7 million metric tons. There are also plans for two additional piers, though those are not yet under construction.

Rason and the surrounding region are endowed with an abundance of natural resources, including coal, iron ore and such minerals as nickel, copper and aluminum. China plans to use this mineral abundance to help facilitate development plans in the northeast. The special economic zone also will play an integral role in North Korea's 10-year strategic plan, announced in January, to develop the country's infrastructure and advance its mining, electricity and industrial sectors.

But perhaps the most important aspect of Rason is its location. Rason sits at the geographic junction of China, North Korea and Russia. A railway connects Rason to the rest of North Korea and to Khasan, a border city in eastern Russia. There are plans for that railway to eventually connect to the Trans-Siberian Railroad. Currently, there is a road stretching from Rason to Hunchun, Jilin province, and if the Yonhap reports are true, there are plans for a railway to be built between those two cities.

The potential for economic integration is not lost on China. In fact, Rason could prove vital to Beijing's efforts to develop China's northeastern territories and break the logistical constraints that plague China. Historically, a lack of transportation infrastructure has prevented natural resources produced in northern China from reaching southern China (and foreign markets). Likewise, it has hindered supply to the north that would be used to develop heavy industry. A nearby port would allow China to transport raw material down the east coast to the core of China.

This likely is what led China to initiate plans in 2005 to develop its northeast provinces and Rason into the largest industrial zone in Northeast Asia. Initially, the plan suffered from a lack of financial support from Beijing. The private sector and entrepreneurs from northeast China footed the bill. But, particularly over the past year, Beijing has begun to increase investment in Rason. This especially applies to large state-owned enterprises, which are better equipped financially to engage in industrial activities. China reportedly struck a deal in the latter half of 2011 to supply electricity to Rason, and Chinese tourists reportedly have been encouraged to visit the region as part of a travel development plan for Changchun, Jilin and Tumen.

Economic Influence Post-Kim Jong Il

Concerned with preserving a smooth power transition, the North Korean regime has apparently insisted on opening Rason to foreign investment. Most of China's current deals regarding Rason were signed by former North Korean leader Kim Jong Il, who hoped they would help facilitate the power transition after he died. This may have been what emboldened China, North Korea's largest economic and political patron, to support its economic influence in the area. China understands its need to strengthen its economic and political hold in North Korea; Beijing cannot risk having an unstable regime on its northeast border. SEZs are particularly attractive to North Korea because in the long run these zones allow Pyongyang to access technology and cash without opening the country to foreign influence.

Over the past two months -- since Kim's death -- China may have increased its assistance to North Korea substantially. A South Korea-based human rights group, Citizen's Coalition for Human Rights of Abductees and North Korean Refugees, claimed that 500,000 metric tons of food and 250,000 metric tons of crude oil have been given to Pyongyang.

Meanwhile, China has been acting as a mediator in bilateral and multilateral negotiations over North Korean affairs. Beijing is trying to bring Washington and Pyongyang to the negotiating table at a meeting slated for Feb. 23. According to media reports, Beijing also was instrumental in bringing North Korea and South Korea to secret talks from Feb. 2 to Feb. 4.

Ultimately, Beijing's geopolitical concern over North Korea comes foremost from the collapse of the regime. Kim's 2008 stroke convinced Beijing of the need to reinforce its leverage over North Korea. And after Pyongyang's second nuclear test in 2009, Beijing knew it would have to take steps to rein in the provocative behavior of its northeastern neighbor. Doing so would help stave off international pressure and stabilize the North Korean regime.

Meanwhile, Beijing has tried to enhance its international leverage in multilateral negotiations over North Korean affairs. China has substantially increased its economic ties with North Korea, has expanded its role as the lifeline of the North Korean regime and has North Korea following its own economic path.

The deal over Rason may be unclear, but China demonstrably is upping its investment in its northeastern neighbor. For Beijing, investing in Rason presents an opportunity to address some of the logistical problems inherent in inter-Chinese trade, particularly with heavy commodities, such as coal. For Pyongyang, accepting Chinese assistance en masse carries the risk of economic dependence. But the fear of long-term economic dependence is outweighed by the fear of regime collapse induced by economic degradation, especially during a sensitive transition period. This fear motivates North Korea's continued acceptance of Chinese investment.


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Chinese Benefits from Investing in Rason is republished with permission of STRATFOR.

Chinese Benefits from Investing in Rason | Global Viewpoint