Pacific Money

China Closes Pyongyang Bank Account

Recent Features

Pacific Money

China Closes Pyongyang Bank Account

A high-level North Korean delegate visits Beijing at a time of interesting developments in China-North Korean bank relations.

What’s been going on between China and the DPRK? We’ve been hearing rumors that North Korea has been rudely rejecting high-level Chinese delegations, with China returning the favor. But if there has been some kind of tit-for-tat, it seems to be over now: Choe Ryong Hae has visited Beijing, probably in no small part responding to the Bank of China's dramatic action from earlier this month.

The closure of the Foreign Trade Bank's account at Bank of China two weeks ago was significant and disruptive, but was even more important in terms of perception and symbolism. The FTB is North Korea's most important bank: it is (ostensibly) the clearinghouse for all foreign transactions and any bank accounts held in foreign currency. FTB customers would experience some temporary disruption of cash flow and there is no doubt debate going on in Pyongyang about whether to endow some other institution with the influence the FTB held.

Meanwhile, FTB officials would likely be going around Pyongyang assuring people that everything will be fine. And that’s probably true: though BOC was surely FTB's most significant banking relationship, it is still possible to replace it. The move was laden with symbolism, however, and is Beijing's clearest shot yet across the Pyongyang’s bow.

For Bank of China, it is very good timing. Over the last several years, it has expanded its operations in the United States significantly, moving into all sorts of markets, from mortgages to securities. By spanking North Korea, it is able to show Washington that it is a cooperative, rule-loving institution. Meanwhile, at a time when China is feeling severely frustrated with its ally, it sends the message to Pyongyang that Beijing still holds the strings.

This week we’re hearing more talk that smaller Chinese banks have quietly followed Bank of China's lead. This, even more than the Bank of China move, is potentially very significant indeed. Rather than a high-profile, headline-grabbing event, this has the potential to really disrupt North Korean businesses. If in the Chinese banking industry, the perception has been that this is what the Chinese leadership wants, we could be shifting into a new, even more risk-averse atmosphere, which will make things very difficult for North Korean traders. It is smaller banks, dotted around China's border regions, that are the true financial arteries for trade and investment in North Korea.

Ultimately, China finds itself in the same position it has been in for years: the fundamental dynamic between Beijing and Pyongyang hasn't changed. Pyongyang is constrained by Beijing's overweening economic and political power in the region. Beijing is constrained by the calculus that any collapse or regime-change scenario will be worse for its interests than the status quo. Both have the power to severely harm one another. There is of course an imbalance here, though: North Korea could end regional economic growth and cause a deep recession, perhaps destabilizing Chinese society; China could end North Korea altogether.

Enter Choe Ryong Hae, arriving in Beijing last week and dispensing rhetoric about as humble as you're likely to hear from Pyongyang. Choe was quoted as saying North Korea "is willing to accept the suggestion of the Chinese side and launch dialogue with all relevant parties." While one musn't get excited about the prospects of a return to negotiations as a means for ending the nuclear program, Choe's statements do probably mean that we (happily) won't see any more trouble on the peninsula for a while.

China’s Ministry of Foreign Affairs can be pleased with itself. Beijing can now say to Washington that it is playing the role of responsible power, reining in the DPRK. China has exercised its influence (which Western analysts tend to overstate) to the greatest degree possible. Moreover, it will feel assured that stability has been preserved for now, and can get about growing its influence (oh, and transforming North Korean society) through its laissez faire stance on trade and investment in the DPRK.

In the wake of the Choe mission, though such things are never spoken about on the record, we should keep an ear to the ground for rumors that Chinese banks are being instructed to avoid going overboard in cutting off North Korea: Beijing wants to punish a little, but not destroy its neighbor. Even if the spate of account closures or delays has ended, we're likely about to see even the most legitimate businesses heading underground, into the colorful world of 500 and 1000 euro notes, no doubt wishing that the Chinese would issue notes larger than 100 RMB.

Unfortunately, those most harmed by the disruptions in the banking system will be people dependent on foreign aid and operations doing legitimate business through the FTB. In that respect, recent developments are business as usual.

Andray Abrahamian is Executive Director of Choson Exchange, a Singaporean non-profit providing training for North Koreans in economic policy, business and law.

Dreaming of a career in the Asia-Pacific?
Try The Diplomat's jobs board.
Find your Asia-Pacific job