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SE C R E T SECTION 01 OF 02 XXXXXXXXXXXX 000004 

NOFORN 

SIPDIS 

DEPARTMENT FOR EAP/K, EAP/CM, INR 

E.O. 12958: DECL: TEN YEARS AFTER KOREAN UNIFICATION 
TAGS: CH ECON EFIN EIND EMIN KN KS PGOV PREL
SUBJECT: WAITING AND WATCHING: NORTH KOREA AFTER CURRENCY 

REFORM 

REF: 09 XXXXXXXXXXXX 167 

Classified By: Consul General Stephen B. Wickman. For 
Reasons 1.4 (b) and (d) 

¶1. (S/NF) SUMMARY: On December 15, EAP DAS XXXXXXXXXXXX and XXXXXXXXXXXX staff met with XXXXXXXXXXXX, a major player 
here in Chinese-North Korean economic exchanges. XXXXXXXXXXXX 
attributed the DPRK,s recent currency reform to several 
factors: controlling rampant inflation, preventing 'hot 
money' flows, leveling the wealth gap between workers and 
traders, controlling domestic currency, and most importantly, 
uncovering potential political opposition. As a result of the 
reform, commerce has come to a halt. The leadership, as part 
of an ambitious 2012 development strategy, hopes for the 
restoration of relations with the United States. XXXXXXXXXXXX also 
believes that current plans assume Kim Jong-il will be around 
for some time and that Kim Jong-un will be his successor. The 
recent recall of DPRK scholars, students and scientists from 
China following the defection of a North Korean exchange 
student, for example, suggests increasing levels of paranoia. 
END SUMMARY. 

GIVE ME GOOD REASON 
------------------- 

¶2. (S/NF) On December 15, EAP DAS David Shear and Consulate 
Shenyang staff met with XXXXXXXXXXXX, XXXXXXXXXXXX visits 
Pyongyang frequently. Admitting he is unsure of the exact 
value of Chinese investment into North Korea, XXXXXXXXXXXX believes 
the number to be many billions of renminbi. Chinese 
companies, like their ROK counterparts, use North Korea as a 
processing zone, primarily in the mining and seafood 
industries. According to XXXXXXXXXXXX, the DPRK leadership's 2012 
target for achieving 'strong-country' status should form the 
principal basis for analyzing recent political developments, 
including the currency reform measure. 

¶3. (S/NF) The most important reason for the recent DPRK currency 
reform, according to XXXXXXXXXXXX, is to uncover political opposition, 
particularly against Kim Jong-il's younger son. Controlling 
inflation, leveling the wealth gap, controlling domestic 
currency and access to foreign currency, are all part of this 
strategy. XXXXXXXXXXXX believes that the third son, Kim Jong-un, 
favored the currency revaluation, and that going forward Kim 
Jong-un leans toward a Vietnamese-style of economic reform. 
Opposition to the currency exchange, according to XXXXXXXXXXXX, might 
reveal who opposes the ascension of Kim Jong-un to 
leadership. According to XXXXXXXXXXXX, Kim Jong-il's support of the 
currency reform points to his favoring the third son; those 
opposing the revaluation, also oppose the third son. XXXXXXXXXXXX drew 
parallels to the 2009 nuclear tests, which he said were 
also influenced by succession plans. XXXXXXXXXXXX said that the first 
son, Kim Jong-nam, opposes his younger brother's reform 
plans and favors a Chinese-style of economic opening. 

¶4. (S/NF) XXXXXXXXXXXX said that the number of factions competing for Kim 
Jong-il's attention have made it increasingly difficult for 
Kim Jong-il to listen to anyone. As a sign of Kim Jong-il's 
paranoia, he recently recalled all students, scholars, and 
scientists in China following the defection of an exchange 
student in Northeast China. He did this despite the need for 
Chinese knowledge, production skills, and technology to 
achieve the country's goals for 2012. However, XXXXXXXXXXXX believes 
that current instability will settle and the government will 
move ahead with reform, fully expecting Kim Jong-il to be 
around for sometime to come. The reform, according to XXXXXXXXXXXX, may 
not be toward a more open economy. Rather, with currency 
reform giving the regime the ability to control domestic 
currency, reforms will lead to tighter control over the 
economy. 

¶5. (S) Prior to revaluation, one dollar equaled 3500 won. To 
put that in perspective, the average worker in Pyongyang 
earns 3000-4000 won per month. XXXXXXXXXXXX reported that according to 
the DPRK Embassy, the official exchange rate following reform 
is now one dollar equals 129 won. For the common person, 

SHENYANG 00000004 002 OF 002 


besides suffering from a significant cut in won-based 
savings, supermarkets and department stores that deal in won 
have suspended activity as they wait to see what impact 
currency reform will have on commodity prices. Thus, it has 
become difficult to purchase day-to-day needs. XXXXXXXXXXXX pointed 
out, if commodity prices rise, the economy will be ruined. 
However, if prices settle as a result of reform, and assuming 
constant wages, the economy will be okay as workers once 
earning one dollar a month will now earn nearly 20 dollars. 

¶6. (S) Traders, who earn many times more than the average 
wage-earner, have been unaffected by the reform in monetary 
terms, as savings are held mostly in euro and dollars. Since 
the revaluation, only stores dealing with foreign exchange 
have been open and prices in these stores have increased 
400-500 percent. For example, a TV that cost RMB 4000 now 
costs RMB 20,000. Many of these stores raised prices in 
anticipation of the reform, with the expectation that prices 
would then fall. However, prices have not fallen. Many of the 
stores that raised prices prior to reform have since been 
closed by the government, their goods confiscated. Thus, even 
traders who have not lost money from revaluation now have 
nothing to buy. Chinese traders along the North Korean border 
have also been affected by currency reform even though most 
trade is done in euros and dollars. As is the case within 
North Korea, people are waiting and watching to see what will 
happen to prices. In the meantime, nobody wants to sell 
anything. 

NOT A CRISIS YET BUT CLOSE 
-------------------------- 

¶7. (S/NF) XXXXXXXXXXXX does not believe the DPRK is in crisis mode at this 
time. As he said, the people are used to this sort of thing. 
He saw the currency reform as being part of a broader 
conflict within the government as it moves forward in the 
next several years. Since 2002, the DPRK has allowed some 
economic reform, without expressing strong support or 
opposition. As he put it, the government has been waiting and 
watching to see what would happen. 

CHINA, the U.S., and EVERYTHING 
------------------------------- 

¶8. (S/NF) XXXXXXXXXXXX said many in the DPRK believe the Chinese do not 
understand their country. While neither the Chinese nor the 
DPRK are likely to criticize the other in public, XXXXXXXXXXXX said 
that in private the DPRK has disparaged the Chinese for not 
including North Korea on its list of 147 tourist destinations 
or 137 investment destinations. These omissions and the 
disparate Chinese actions on regional development projects 
clearly indicate that North Korea is not a priority for the 
Chinese. For instance, while China recently elevated the 
long-beleaguered Changchun-Jilin-Tumen River development plan 
to a national level project, the DPRK left the Tumen River 
Development Plan, as it sees no benefit (REFTEL). Relations 
between the two countries were getting so bad, in fact, 
Premier Wen Jiabao visited Pyongyang two months ahead of 
schedule. 

¶9. (S/NF) According to XXXXXXXXXXXX, North Korea has set an ambitious 
target of developing a strong country by 2012. As part of 
this project, it is planning to build 100,000 residential 
apartments in Pyongyang by 2012. In order to encourage 
Chinese investment, the DPRK is offering Chinese investors 
mining and ocean rights for their injection of cash into the 
project. A former Consul General of the North Korean 
consulate in Shenyang, recently spent two weeks in Beijing 
attracting about RMB 12 billion for this project and planned 
to come to Shenyang following his time in Beijing. 

¶10. (S) Restoration of relations with the United States is 
another important part of the DPRK's reform plans. He said, 
however, that North Korea looks forward to an ongoing cycle 
of ups and downs in negotiations and that it counts on the 
U.N. to be slow in implementing sanctions. As he said, he 
believes that once things settle down, North Korea will show 
China and the U.S. "its bottom card." 

WICKMAN