PAJU, South Korea (Reuters) - North Korea closed access to a joint factory zone with South Korea on Wednesday, officials said, putting at risk $2 billion a year in trade that is vital for an impoverished state with a huge army, nuclear ambitions and a hungry population.
The move marked an escalation in North Korea's months-long standoff with South Korea and its ally Washington. On Tuesday, Pyongyang said it would restart a mothballed nuclear reactor, drawing criticism from the international community, including China, its major benefactor and diplomatic friend.
In Beijing, China's deputy foreign minister met ambassadors from the United States and both Koreas to express "serious concern" about the Korean peninsula, China's Foreign Ministry said, in a sign China is increasingly worried about events spinning out of control. The ministry said the meetings with Deputy Foreign Minister Zhang Yesui took place on Tuesday.
South Korea demanded Pyongyang allow access to the Kaesong Industrial Park, which lies just inside North Korea.
It said North Korea would allow the roughly 800 South Korean factory managers and workers in the zone to return home, but added that only 36 had opted to do so on Wednesday, indicating factories were still operating.
Those remaining in the zone were there by choice but could run out of food because all supplies needed to be trucked in from South Korea, said the Unification Ministry, which handles Seoul's matters with North Korea.
"If this issue is prolonged, the government is aware of such a situation materialising," ministry spokesman Kim Hyung-suk told reporters when asked about food shortages.
The industrial park has not formally stopped operations since it was inaugurated in 2000 as part of efforts to improve ties between the two Koreas. It houses 123 companies and employs 50,000 North Koreans making cheap goods such as clothing.
Some South Korean experts said the North's move might be temporary given the park is a financial lifeline to Pyongyang.
At the South Korean border city of Paju, there was a sense of foreboding that Kaesong would be closed permanently, dealing a death blow to the one remaining example of cooperation between the two Koreas.
"Trust between North and South will fall apart, as well as the trust we have with our buyers. We're going to end up taking the damage from this," Lee Eun-haeng, who runs an apparel firm in Kaesong, told Reuters on the southern side of the border.
Lee's business employs 600 North Koreans who earn $130 on average a month.
The zone has major symbolic value for both North and South Korea. It generates cash for the North and acts as beacon for the economic prosperity of the South inside the grim, centrally planned North Korean economy where jobs are scarce.
"The North Korean workers there are said to have 300,000 family members," said Ahn Chan-il, a former North Korean military official who defected to the South in 1979.
"Does electricity go off in the Kaesong factories at any time? No. But North Korean factories see that happen to their facilities all the time."
WAR OF WORDS
North Korea's latest war of words with Seoul and Washington ratcheted up when the United Nations imposed fresh sanctions on the country for its February 12 nuclear test. At the same time, South Korea and the United States have been staging annual war games, which Pyongyang claims are a prelude to an invasion. Those exercises run throughout April.
Despite the rhetoric and the cutting of telephone hot lines to the South, Pyongyang has not taken any military action and shows no sign of preparing its 1.2 million strong armed forces for war, Washington says.
That would indicate much of the vitriol is intended for domestic consumption to bolster young leader Kim Jong-un ahead of celebrations marking the anniversary of the birthday of Kim Il-sung, the state's founder and the younger Kim's grandfather, on April 15.
Kim has also used the rising tensions to cement his grip on power by appointing a key ally of his uncle and aunt as the country's prime minister.
"At least until the end of April, when drills end, the North is likely to keep up the tensions as it had done in previous years," said Cheong Seong-chang of the Sejong Institute think tank in Seoul.
The 30-year old Kim was showing the North could stand up to the United States and to South Korea's new President Park Geun-hye, who took office just a week after the nuclear test, the country's third, said the defector Ahn.
"North Korea doesn't have the economic power that South Korea has but it's stressing its nuclear abilities to show that it can pull equal weight," he said.
News of the Kaesong closure initially hurt South Korean financial markets. The won currency was trading at a six and a half-month low in early trade but later recovered.
North Korea is heavily reliant on Kaesong and China. Its powerful neighbour accounts for almost $6 billion in trade, according to estimates from Seoul.
One South Korean worker who travels in and out of the zone each day said North Koreans there had become less friendly as tensions had risen in the past month.
"They used to smile at my jokes or the soldiers at customs liked to chit chat. They really liked South Korean duty-free cigarettes but this week it all looks different," said Jang Sun-woo.
(Additional reporting by Christine Kim and Jack Kim in Seoul and Ben Blanchard in Beijing; Editing by David Chance and Dean Yates)
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