Currency shift hits North Korea business, spooks China traders

DANDONG, China (Reuters) - Traders in the Chinese border city of Dandong say business has been drying up in neighboring North Korea following an abrupt currency shift that could spell months of uncertainty for its fragile economy.

Trucks laden with goods roll across a snowy, one-lane bridge connecting the two countries, but the traders said many shops and markets within impoverished North Korea had closed as owners try to get a clearer idea of how currency rules and prices will be set by the state, which dominates the economy.

"Our clients are all waiting to see what the new exchange rate will be. Those holding goods are waiting to sell," said a Chinese pharmaceuticals merchant, who has done a booming business selling vitamins and nutritional supplements to customers in the North.

"Shortages mean everything's really marked up over there. Pharmaceuticals sell for about ten times the price here."

North Korea last week abruptly announced a revaluation of its currency so old notes of its won currency will be exchanged for new ones at a rate of 100 to one.

A cap on the amount of currency that can be exchanged could wipe out anyone holding too much wealth in North Korean won. It has also left North Koreans uncertain of the exchange value and acceptability of the new money.

From office desks decorated with bronze bulls and ashtrays, the traders in Dandong are among the first outsiders to sense economic tremors in North Korea, where they supply everything from refrigerators to fruit and pink baby shoes.

The currency move "has the potential to be a destabilizing move for North Korea because it will adversely impact a wide cross section of the population, well beyond merchants who have accumulated wealth," Kay Seok, a researcher for Human Rights Watch in Seoul, said this week.

The decision added to anxiety about North Korea's economy while Pyongyang has been edging toward fresh engagement with Washington, whose envoy Stephen Bosworth ended a visit to the North on Thursday, seeking to draw it back to talks aimed at ending its nuclear weapons program.

"As soon as the news (of the currency change) came out, there was a clear drop in our new orders," said one trader in a silent, dusty office with leather couches. He asked that his name and company not be identified, for fear of upsetting his North Korean clients, as did many other traders interviewed.

"Even after the new currency comes out, no one will trust in it," he said. "It will be at least half a year before the economy works through the damage."

But much border trade is conducted in Chinese yuan or U.S. dollars, and so orders are still shipping for now. Truck traffic dipped last week but has recovered somewhat this week.

"I think they chose a good time to do the change. In a planned economy, things wrap up at the end of the year," said Lu Yuliang, who exports trucks to North Korea.

"If this had been done in the middle of the year, it would have been more chaotic."

BORDER TRADE

China is North Korea's biggest trade partner, and 70-80 percent of goods goes through Dandong, whose garish, neon-lit riverfront contrasts with the darkness on the other side of the Yalu River that marks the border.

In the first 10 months of this year, bilateral trade was worth US$2.04 billion, down 4 percent from the same period last year, Chinese customs data show.

On the river, Chinese tourists hire speedboats to catch a glimpse of North Korean border guards. On the North Korean side, coal is loaded into barges for export.

North Korea has to import about 1 million tonnes of grain, or one-fifth its consumption, the U.N. Food and Agriculture Organization estimated after a tour last week [ID:nTOE5B8099].

Persistent energy shortages mean North Korean factories barely function, driving the country to import even more household goods from China while exporting coal and ores to earn foreign exchange.

At the duty-free shop at Dandong's customs yard, children's clothes and men's leather shoes competed for shelf space with brandy bottles and an elegant coffee set, in a sign that even common goods are a luxury in an economy hobbled by sanctions.

The shortages lead to inflation, which in turn may have triggered the currency revaluation, traders said.

The North Korean currency also weakened by over 25 percent against the yuan, according to Reuters calculations, in the year after North Korean leader Kim Jong-Il appeared to have had a stroke in August 2008.

The currency seems to have stabilized as Kim regained his health, and as trade with South Korea revived following sharp dips during tensions in the spring.

Foreign analysts said the revaluation, and in particular the cap on exchange, effectively impoverishes the small merchant class which has established a foothold in the black markets and was becoming more independent of the state.

"It's bad for anyone with savings in won," said an ore broker surnamed Wang, who crosses the border a few times a month. "But anyone with money there saves it in dollars or yuan anyway."

(Additional reporting by K.J. Kwon in Dandong and Christine Kim in Seoul; Editing by Chris Buckley and Nick Macfie)