Chinese rail deal raises hopes for economic shift in North Korea

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North Korea is hoping to woo billions of dollars in foreign investment to rejuvenate its tattered industrial landscape after signing a deal that gives a small Chinese rail company the right to invest in a huge swath of the Hermit Kingdom's economy.

For decades, the Democratic People's Republic of Korea has been among the most isolated places on earth, cut off from the broader world politically and economically. It remained steeped in deep poverty as its neighbours in China and South Korea embraced reforms that radically remade their countries.

But a new deal with China Railway Investments Group Ltd. promises to propel the secretive nation along a path similar to what China itself followed in becoming a middle-income nation whose people now trade and travel broadly. The deal will see the state-owned Chinese rail entity form a joint venture with a North Korean government-backed company to make investments and bring in other foreign investors. Details of the deal were provided to The Globe and Mail by some of those involved.

North Korea is "not so set in their ways as people think, and they're looking to embrace ways to change. Of course they look at China as a model of how things can be," said Rudi Sirr, chairman of Heuimang Investments Group, the joint venture company created by the deal. Its name means Great Hope. "I'm hoping that people will see North Korea the way I see it, as just a land of opportunity," he said.

The possibility of change in North Korea is set against a history of misfires: the country has drafted foreign investment laws dating back to the 1980s, with little to show for it. It remains a totalitarian state with a highly-centralized and militarized power structure that makes transformation difficult. Even in China, the transition from a state economy took decades to begin in earnest.

At the same time, small shifts in North Korea have already begun under Kim Jong-un, the country's third-generation Supreme Commander. Farmers have new latitude to sell their own produce, small markets have proliferated and taxi fleets are expanding, providing more options to a population with increasing – although still highly limited – access to modern devices like smartphones. Some employers have been given the right to set pay based on performance, and outside observers have estimated the economy is growing slightly.

What North Korea lacks is money. Its desperation for foreign currency is among the reasons it has sent tens of thousands of its own people to work in places like Qatar and Russia. The North Korean government takes most of their pay as revenue in what has been termed "state-sponsored slavery." To drum up investment, it has held trade fairs in China, and even released a promotional video boasting that in North Korea, "the tax rates are very low."

Foreign investors have a long history of being burned by North Korea, most notably Volvo which, with interest, is now owed more than $400-million by Pyongyang for 1,000 cars the country stole in the 1970s. And North Korea is notoriously unpredictable: on Wednesday, South Korea's Yonhap news service reported that the country's vice-premier was executed earlier this year for poor performance.

China has nonetheless been more willing than others to invest, with entrepreneurs pouring money into hotel and casino developments near the Chinese border. Beijing has even published a guide to investing in North Korea, which says the country "has relatively large potential for economic development."

The China Railway deal, however, stands to far exceed anything before it – offering, for China, a chance to buy stability inside a neighbour whose collapse it has long sought to forestall.

"Rather than China putting North Korea on aid, why not put it on investment – so you're effectively capitalizing your aid?" said Laurence Brahm, a lawyer familiar with China's own path to capitalism since he was part of the state enterprise reform teams in China in the 1990s. He thinks the same can be achieved in North Korea. "They're going to bring peace to the Korean peninsula with money, not with guns."

The deal is hugely ambitious, giving the Chinese rail company an opening to invest in some 12 North Korea sectors, a list that includes the Rajin port; an east coast high-speed rail line; electrical plants; oil refineries; gold, iron, zinc, tin, graphite, rare earth and coal mines; cable television; Internet; banking; and agriculture, namely fishing and cattle breeding.

Rajin, on North Korea's north-east shoulder, is of particular importance. An ice-free port a quick sail from Japan, it offers a potential eastern terminus to China's new Silk Road, allowing Pacific goods to start a cross-Asia rail journey that could reshape the way cargo moves across the continent.

"The ramifications are significant on a regional basis for north-east Asia. Transformative, actually," said Phillip Hynes, a British risk management adviser to the North Korean company in the deal. He characterized the sweeping nature of the agreement as evidence North Korea wants a "holistic economic development strategy."

The deal is structured so invested money resides in Hong Kong to ensure it's "not just getting pumped into North Korea blindly," Mr. Hynes said. Pyongyang has also agreed to allow arbitration in a third country in case of disputes.

Still, it's not clear what will result from the deal, whose financial terms were not disclosed, and whose giant list of possible investments raised eyebrows.

"If you pay attention to North Korea for any length of time, you get used to seeing grand plans being talked about – and then nothing happens," said Andray Abrahamian, executive director of Choson Exchange, a group working to train North Koreans in business.

Some of the plans seem fanciful, he added, for a country with an average income estimated at $1,000 to $2,000 (U.S.) a year. "There isn't currently the need for high-speed rail," said Mr. Abrahamian. "That raises a flag to me, because it seems so ambitious." Other sectors would require extraordinary internal reforms for business to prosper, such as cable television.

More likely, Mr. Abrahamian believes, is that North Korea pursues a slower transformation, perhaps by sending more of its people abroad to do business and learn skills valuable at home.

The deal itself involves an unusual cast of companies and characters.

The North Korean government is represented through its majority ownership in Daegian, a Singapore-registered company. Among its shareholders is Mr. Sirr, a Burmese-born businessman and its executive chairman who worked for Lloyd's of London before spending a career as a globe-trotting insurance consultant. A chance encounter with a North Korean official in the British capital led to a friendship that eventually brought Mr. Sirr to Pyongyang. In 2006, he spearheaded a failed effort to get a North Korean iron ore mine listed on the London stock exchange.

However, he maintained ties with North Korean officials and Daegian is, he says, "trusted by the North Korean government, which has granted Daegian certain privileges to develop the more significant opportunities in the country."

China Railway Investments Group, meanwhile, is not among the goliaths of the Chinese industry. It separated from the state behemoth Ministry of Railways in 1998, with an initial registered capital of 80.5-million yuan, the equivalent of just under $17-million (Canadian) today – not enough to build a single kilometre of high-speed rail in modern China. It has invested in advertising, hotels and mining. It has also pursued overseas projects, such as construction of high-speed rail in Thailand and California – none of which has come to fruition.

Mr. Hynes said it is involved as a Chinese state-owned rail company with an international focus, "part of a consortium for this, the public face of it," he said. They have "other big SOEs [state-owned enterprises] behind them."