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Coming Attraction: Kim Jong-un on Wall Street

Coming Attraction: Kim Jong-un on Wall Street
By Anthony Rowley

(Pyongyong, August 1, 2020) Pyongyang stocks closed higher on news that North Korean "B" shares are to be listed on the Seoul Stock exchange and that a raft of recently issued North Korea mutual funds are proving popular. Investors have been beating a path to Pyongyang's door lately.

Speaking on the trading floor of the Pyongyang Stock Exchange, Supreme Leader Kim Jong-un recalled a sentiment often attributed to the late Chinese paramount leader Deng Xiaoping: "To get rich is glorious." Socialism "with North Korean characteristics," Kim boasted, “can give capitalism a run for its money any day."

The news item above is fiction, for now, but the day when North Korea opens its mineral-resource rich economy to an outside world that is eager also to tap into the country's cheap and well educated labor pool and its potential for joining global supply chains may not be too distant given recent developments.

Some see North Korea as the next big thing for investors now that the Donald Trump and Kim Jong-un summit in Singapore has ended with a walkabout (rather than a walkout) by the two leaders. Denuclearization may be some way off yet but outside interest in the economic potential of North Korea is rising.

The general verdict on the extraordinary Singapore summit (from "war war” to “jaw jaw" within the space of a few months) is that there is still a way to go before it can be said that Trump's art of the deal has paid off. But the economic and financial implications of the summit are more immediate.

Unless there is a reversal of the Singapore agreement (not impossible, given the volatile nature of the two summiteers) the emphasis now in Pyongyang and Seoul will be on economic as well as military matters. Kim Jong-un has emphasized his desire to modernize North Korea's economy but he cannot afford to do so alone.

Nor will South Korea be able to pick up the tab in the same way that West Germany did for East Germany several decades ago when the two halves of the divided nation were reunified. Outside aid and investment – a great deal of it – will be needed from governments, multilateral agencies and private investors.

Providers of bilateral official aid, in addition to South Korea, will include China, Japan and maybe the United States and European countries. Multilateral aid, too, will flow in time. But the more intriguing question is how private investment -- whether of a business or portfolio nature – will flow into the hermit kingdom.

Fund managers, who usually like to be ahead of the game, will likely approach investment in North Korea initially via an indirect route – targeting stocks of outside companies that are likely to be doing more business with North Korea as, presumably, the denuclearization process begins to unwind.

South Korea's Hyundai, already involved in cross-border ventures with the North, along with other South Korean chaebol – industrial conglomerates – will very likely attract fund manager interest in coming months, as will Japanese giants like Mitsubishi Heavy Industries or construction giant Komatsu, not to mention listed Chinese enterprises.

It would not be surprising if, in addition, investment houses should start churning out Korea Funds – not of the kind that proliferated in the 1980s and early 1990s to invest in South Korea's export boom but new ones designed to capitalize on the prospective opening up of the North Korean economy.

In the same way that North Korea's economic development from here on is likely to reflect the Chinese model of foreign company-invested special zones, so the evolution of portfolio investor exposure to the North could mirror the Chinese model of "A' and "B" shares – the latter being listed in Seoul and elsewhere.

There are myriad potential opportunities in North Korea for outside investors. Apart from a vast need for new infrastructure in the form of highways railroads, energy and communication networks, etc. – all of which suggest opportunities for foreign contractors and suppliers – North Korea is rich in minerals.

The country's mountain ranges conceal not only nuclear testing sites but also, according to some estimates, 200 varieties of minerals, including gold, iron, copper, zinc, magnesite, limestone, tungsten, and graphite, Some of these stocks are said to be among the largest in the world, with a total value of perhaps up to US$10 trillion.

As it happens, that is perhaps around the same sum of money that it will require to modernize North Korea's economy and bring it onto a par with that of the much more highly developed economy of South Korea. And, exploiting this vast mineral wealth will obviously require foreign finance and technology.

As Jesper Koll, head of investment house Wisdom Tree, Japan, in Tokyo, has noted, "As North Korea prepares to emerge slowly but surely from decades of isolation, an enormous potential investment opportunity is about to unfold." Japan for one has the wherewithal to benefit from this, if only its political relations with Pyongyang can be strengthened.

The reason why North Koreans cannot turn to their cousins in the South of the country to take care of the cost of economic modernization, in the same way that that the East Germans were able to from their West German counterparts is a matter of scale, as Koll has pointed out.

East Germany's modernization required some $2 trillion of public sector support and $3 trillion of private sector investment, mainly from West Germany. That was doable in terms of the relative size of the two economies. North Korea could require up to $10 trillion of investment – way beyond the ability of South Korea alone to provide.

It is by no means beyond the resources of China and Japan, acting together with South Korea, however, not to mention potential US and European investment. Then there are the multilateral institutions – the World Bank, Asian Development Bank, Asian Infrastructure Investment Bank, etc. – once Pyongyang shows serious interest in joining those bodies.


Anthony Rowley is a former Business Editor and International Finance Editor of the Hong Kong based Far Eastern Economic Review and has spent some 40 years writing on Asian affairs from Singapore, Hong Kong and Tokyo. He currently writes for the Singapore Business Times, among other publications.

Published in: July 2018

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