VZCZCXRO3060 PP RUEHCN RUEHGH RUEHVC DE RUEHSH #0007/01 0160225 ZNY CCCCC ZZH P 160225Z JAN 08 FM AMCONSUL SHENYANG TO RUEHC/SECSTATE

WASHDC PRIORITY 8322 INFO RUEHOO/CHINA POSTS COLLECTIVE RUEHMO/AMEMBASSY MOSCOW 1147 RUEHUL/AMEMBASSY SEOUL 1778 RUEAIIA/CIA WASHDC 0081 RHMFISS/COMUSKOREA J2 SEOUL KOR RUEKJCS/DIA WASHDC 0062 RHHJJAA/JICPAC PEARL HARBOR HI 0026 RUCGEVC/JOINT STAFF WASHDC 0037 RHEHAAA/NSC WASHDC RUEKJCS/SECDEF WASHDC 0084 RHMFISS/SACINCUNC SEOUL KOR C O N F I D E N T I A L SECTION 01 OF 03 SHENYANG 000007 SIPDIS SIPDIS DEPARTMENT FOR EAP/CM, EAP/K MOSCOW PASS VLADIVOSTOK E.O. 12958: DECL: TEN YEARS AFTER KOREAN UNIFICATION TAGS: PREL PINR PGOV ECON KN KS CH SUBJECT: PRC-DPRK: TRILATERAL RAILWAY HANG-UPS; MUSAN OUTPUT DROP; 2007 TRADE AND PORT MODERNIZATION; SINUIJU MARKET Classified By: CONSUL GENERAL STEPHEN B. WICKMAN. REASONS: 1.4(b)/(d). 1. (C) SUMMARY: Unreported DPRK-related obstacles appear likely to delay the implementation of a late December PRCDPRK-Russian agreement that aims to link the Greater Tumen region by railway; Chinese contacts are pessimistic that the new Tumen-Tumangang-Khasan cargo-transport corridor, even if realized, will add much momentum to the longstalled Tumen River Area Development Programme. Exports from the DPRK's Musan Iron Mine dropped by up to 200,000 tons in 2007 as a result of energy shortages, according to one Chinese official, who claimed that overall PRC-DPRK trade levels in a key border region also fell as result. On the good news front, progress by PRC border authorities on a port-modernization program is slowly becoming visible. Farther south along the border, negotiations are under way for the establishment of a joint PRC-DPRK market near Sinuiju, where first-year revenues are estimated to be USD 4-5 million. END SUMMARY. 2. (C) Poloff traveled January 7-11 to Changchun, capital of Jilin Province; Yanji, seat of the Yanbian Korean Autonomous Prefecture; Tumen, which borders the DPRK's Namyang; and Nanping, across from the Musan Iron Mine. This is the first in a two-part update on the PRC-DPRK border in late 2007/early 2008. PRC-DPRK-RUSSIA RAIL AGREEMENT: OBSTACLES REMAIN --------------------------------------------- --3. (C) PRC media reports hailed the late December inking of a new trilateral PRC-DPRK-Russian agreement that will, if realized, facilitate the transport of railway cargo in the Greater Tumen region, directly linking the PRC's Tumen (via Namyang, just across the Tumen River) with Tumangang (in

Rajin-Sonbong, DPRK) and Khasan, Russia (directly across the Tumen River via rail bridge). Local Chinese officials hope the Tumen-Tumangang-Khasan rail accord will offer Yanbian an important rail link to Russia, cut cross-border transport costs and, as some Chinese press reports eagerly claim, leverage borderland Jilin as a transport hub. Poloff on January 8 met with Tumen Foreign Affairs Office Director CUI Zhenglong (strictly protect), who was intimately involved in the negotiations. Cui sounded cautiously optimistic on the accord but offered that a number of obstacles remain, unreported in the sunny domestic PRC coverage of the agreement. 4. (C) One shorter-term roadblock stems from an unresolved agreement over transport fees for cargo transshipped through the DPRK. The PRC has apparently pressed North Korea for a standard per-kilometer fee per international practice, but Cui noted that local DPRK authorities have yet to secure Pyongyang's authorization. Another obstacle concerns different track gauges between Russia, on the one hand, and the PRC and DPRK, on the other. More important is another structural difficulty: the poor quality and reliability of North Korea's rail network. (One academic contact in Yanji assessed this as the most salient problem, arguing that the North Korean tracks in their present condition are unsustainable over for safe, reliable cargoshipping. He recalled in detail, for instance, the shoddy maintenance and deplorable state of the tracks during an uncomfortable train ride he took last year from Yanbian to Rajin.) Asked about prospects for possible PRC investment in refurbishing the North Korean tracks, Cui did not sound optimistic. Tumen Vice Mayor YAN Zhihong (strictly protect) nevertheless expected that the trilateral deal could likely be implemented this year, claiming it would boost Tumen's beleaguered economy. 5. (C) The Tumen-Tumangang-Khasan rail agreement, at least in the overcooked PRC domestic reporting on the issue, is being cast as a triumph for the Tumen River Area Development Programme (TRADP), which has largely stalled for years. Contacts throughout Yanbian, including government officials directly involved with the TRADP, SHENYANG 00000007 002 OF 003

remain pessimistic about progress overall, and similarly so when asked if the rail agreement would push the TRADP forward. One official in Yanji currently involved in TRADP affairs observed that local Yanbian leaders, particularly in Tumen, generally come into office eager to revitalize the TRADP. But their plans eventually run aground after encountering the reality of the larger, thorny politicostrategic problems that continue to stunt the development scheme. His familiar litany of well-known obstacles included territorial disputes among TRADP members, differing political systems, as well as cultural and historical differences, inter alia. Real progress in the TRADP, he maintained, requires tackling national-level problems that are simply unsolvable at the local level. And while many local officials take TRADP seriously, they report that the program is not on Beijing's radar screen in a consistently appreciable way. MUSAN IRON MINE: 2007 PRODUCTION PROBLEMS, SAYS OFFICIAL --------------------------------------------- ----------6. (C) MUSAN OUTPUT DROP. Musan's exports of iron ore through Nanping Land Port to the Yanbian Tianchi Company decreased approximately 200,000 tons in 2007, to a year-end

total of 600,000 tons (down from 800,000 in 2006), according to a knowledgeable senior official in the office responsible for all of Yanbian's land ports. The official on January 8 told Poloff that the North Koreans cited energy problems--a lack of electricity (e.g., difficulties in hydroelectric power generation) and fuel for generators-as reasons for the drop. Press reports in the PRC borderland newspapers, though, pointed to increases in Chinese imports of North Korean iron ore through other Chinese land ports south of Yanbian in 2007. 7. (C) NANPING LAND PORT. During a thirty-five minute observation between 1240 and 1315 in Nanping on January 9, Poloff found an eerily--and uncharacteristically--quiet Nanping Land Port. Both directly across the Tumen River in Musan (where loaded trucks have queued at similar times during previous visits) and on the PRC side, Poloff saw no trace of the usually omnipresent red Yanbian Tianchi Co. trucks hauling iron ore from Musan into Nanping, nor of a major security presence, save for one People's Armed Police officer who demanded that Poloff leave the facility. Smoke issued out of the Yanbian Tianchi's nearby processing facility, but Poloff saw few other signs of life. 2007 CROSS-BORDER TRADE: YANBIAN, TUMEN --------------------------------------8. (C) Overall Yanbian-DPRK trade dipped just slightly in 2007 due to the drop-off in Musan's exports through Nanping, according to the senior Yanbian port official. He reported that Quanhe and Nanping remained Yanbian's most critical ports for cross-border PRC-DPRK trade, but he added that Tumen Land Port also saw a relatively robust trade volume because of the aid and other commodities transported to the DPRK via the railroad port. He said the trade composition remained roughly the same, though he noted that another consequence of chronic DPRK fuel shortages over the past year was a decline in North Korea's seafood trade with Yanbian. The official noted that this was evident, too, in the seafood trade between North Korea and Japan; North Korean fishing ships frequently no longer had sufficient fuel to motor out into international waters to trade with Japanese ships, as they typically did in the past. 9. (C) Domestic commodity price inflation, especially for staples like pork and cooking oil, was a recurring theme in Yanbian, even though most of our contacts in Changchun and Yanbian suggested the likely impact on PRC-DRPK trade in early 2008 would be limited. Yanbian University DPRK expert GAO Jingzhu (strictly protect), however, said the increase in PRC food prices may well translate into a decline in cross-border trade volume, as rising prices place a growing burden on North Korean efforts to import rice, grain, meats and other staples through regular trade SHENYANG 00000007 003 OF 003

channels. A Shenyang-based contact who travels to the DPRK monthly for business told Poloff that during a weeklong trip to Pyongyang and Sinuiju in December, he found almost no pork and far less meat in markets than he recalled seeing during his many previous visits. (We cannot confirm a direct link to the rise in Chinese pork prices in recent months, but our contact, himself involved in cross-border trade, believed there was such a link.) PORT MODERNIZATION: YANJI, TUMEN, NANPING -----------------------------------------

10. (C) Progress is slowly becoming visible as Yanbian gradually overhauls and modernizes its ports under the aegis of the Eleventh Five-Year Plan. The focus thus far, according to the senior Yanbian port official, is on upgrading Yanji's airport, where officials are now planning to build a customs/quarantine warehouse for the many goods entering every week on regular South Korean flights into Yanbian. No new PRC-DRPK land/railway ports are planned, however; rather, the emphasis is on streamlining, modernizing and standardizing existing ports. He speculated that there may be some closures of second-tier or redundant land ports involved in PRC-DRPK interchange, like Chongshan (across from Samjang-ri, near Nanping/Musan). 11. (C) Final construction on a modern new administration building at Tumen Land Port continues past its initial December deadline, though the finish line is near: Tumen FAO Director Cui Zhenglong expected March or April as the likely end date. (The senior Yanbian port official added that there has been no expansion in staff size for the new facility.) Poloff found evidence of modernization, too, at the Nanping Land Port on January 9: a large new archway at the mouth of the PRC entrance to the port's bridge into Musan, as well as a robust new exterior fence enclosing the port, both new additions since Poloff's previous visit during the summer. Local governments are largely picking up the tab, though Beijing is apparently reimbursing the improvements. In Tumen, for instance, Cui Zhenglong said he recently applied to the central government for RMB 3 million (USD 415,000) in reimbursement for the new landport building. SINUIJU: DETAILS ON PROPOSED NEW MARKET --------------------------------------12. (C) Farther south along the border, negotiations are under way for establishing a joint PRC-DPRK market in Sinuiju, across the Yalu River from Dandong, Liaoning Province. LIU Chensheng (strictly protect), a trade official-turned-businessman who facilitates PRC investment in North Korea via the Liaoning Civilian Entrepreneur Association's Korean Liaison Office, on December 14 supplied Poloff with a feasibility study for the project, which he is negotiating on behalf of the Shenyang-based Wu'ai Group. The proposal for the market, called the DPRKChina Friendship Commodity Distribution Center, initially envisions 100 Chinese businesses on site selling everything from garments and electrical appliances to office products and food. The feasibility study estimates first-year revenues at USD 4-5 million, with the market's management office taking a cut of profits. Liu claimed that Sinuiju officials have designated a site for the market on Bidan Island (Xitan Farm)--on the Yalu River between Sinuiju and Dandong--but also had to designate a temporary site for the market within Sinuiju proper because budgetary problems hindered their ability to build the necessary infrastructure at the Bidan Island site. WICKMAN