YANJI, China (Reuters) - A new stretch of China's G12 expressway arcs toward the northernmost tip of North Korea, connecting one of the world's most vibrant economies to probably its most stagnant. It is a symbol of China's long-term goal of building economic ties with its unpredictable neighbour.
But the thin traffic along a highway lined with fallow fields in China's Jilin province, two years after it was finished, shows how far there is to go and why plans for high-speed rail links to Chinese cities along the border look misplaced.
The problem for Beijing is twofold: getting Pyongyang to buy into the idea of economic reform and the reluctance of Chinese businessmen to venture into one of the world's riskiest investment destinations.
While China is frustrated with Pyongyang over its threats to wage war on South Korea and the United States, its efforts to build economic links with North Korea from places like Jilin help explain why Beijing is unlikely to crack down hard on the reclusive state.
Since then-Premier Wen Jiabao went to North Korea in 2009 - just months after Pyongyang's second nuclear test - China has sought to stabilise the Korean peninsula by stepping up its effort to steer the North toward economic reform. China is not about to give up that goal even though it's under U.S. pressure to get tough after North Korea's third nuclear test, on February 12.
"It's not even shepherding anymore. It's more of just inundating North Korea with all of these influences from the Chinese side where the idea is to essentially corrupt them, show them what it tastes like to make money," said John Park, a North Korea expert at the Massachusetts Institute of Technology and the Harvard Kennedy School.
China oil imports to N.Korea link.reuters.com/fud86t
GRAPHIC: Korean economic divide r.reuters.com/gyn84t
GRAPHIC: N.Korea's military link.reuters.com/zur27t
WEN'S VISIT A CATALYST
Chinese investment in North Korea was paltry before Wen's visit, according to researchers.
Recent statistics are hard to find, but his trip breathed life into two economic zones: one at Rason, 50 km (30 miles) inside the North Korean border, opposite Jilin, and the other near the Chinese city of Dandong, further south in Liaoning province. Some factories and farms are operational in Rason. The zone near Dandong is still being built.
Wen's trip opened the door to mining deals and allowed China to help expand the small port at the North Korean city of Rajin, the northernmost ice-free port in the region. His visit also paved the way for more North Korean state trading firms to do business in China, Park said.
Annual two-way trade is estimated at around $6 billion, making China the North's biggest trade partner.
After Wen's trip, then North Korean leader Kim Jong-il visited China three times before his death in December 2011. Among the places he saw was a flat-screen TV maker, an industrialised farm and a high-tech research and development centre. Current ruler Kim Jong-un, the elder Kim's son, has not visited China since taking power.
But doing business with North Korea is frustrating, even for those in Jilin's ethnic Korean prefecture of Yanbian, where many residents speak Korean and have links to the North.
The owner of a car company in Yanji, the region's main city, would love to see truckloads of his vehicles head along the G12 and into North Korea. In an advertisement, the firm is billed almost exclusively as an exporter, but the reality is different.
"Most of our business is in China now," said the company owner, who declined to be identified because he was concerned it would make it even harder to work with North Korea.
The manager of a Yanji Korean trade association who sells food packaging bags to North Korea also said it was difficult.
"We are doing less and less business with them now," he said.
While China has halted some overland tourism into North Korea in the wake of the recent tensions, businessmen in Yanbian said most curbs came from North Korea.
"Their demands are higher and higher. Visas are difficult to get, crossing the border is difficult and they limit the things that can go across," said the trade association manager, who also declined to be identified.
Some Chinese firms were also starting to lose confidence in investing in the Rason zone, said an official at the Jilin government who had knowledge of the matter. South Korea's Yonhap news agency said last year the zone would get $3 billion in investment from Beijing.
JILIN'S KOREAN SPEAKERS WORK IN SOUTH KOREA, NOT NORTH
While decades of market reforms sparked an economic boom in China's coastal regions, the dismantling of many state firms as part of those measures took a toll on northeastern provinces such as Jilin and Liaoning.
China has embarked on a programme to revitalise its rustbelt northeast, but some economists say a turnaround will partly rely on when Jilin and Liaoning can tap the potential mineral wealth and cheap labour of North Korea.
That, in turn, depends on Pyongyang.
"For the relatively impoverished North Korean government, China's northeasterly drive ought to represent a golden opportunity," Adam Cathcart and Christopher Green, editors of SinoNK.com, a website that specialises in ties between North Korea and China, wrote in an article this month.
"However, the response to date has been a complex mix of enthusiasm, investment and retrenchment, fear, and paranoia, abject confusion and even a certain strategic ambivalence."
China shares a 1,400 km (870 mile) border with North Korea, roughly two-thirds of which belongs to Jilin. More than a million ethnic Koreans live in the province. The government hopes they can one day act as a bridge with North Korea but has instead exported Korean-speaking labour to work in South Korean factories since the early 1990s.
Jilin accounts for 28 percent of Chinese investment in the North, with 34 percent from Liaoning.
Experts say one of Beijing's top objectives in hosting Kim Jong-il multiple times from 2000 to the time he died was clear: to showcase the fruits of China's economic reforms.
Indeed, a source with ties to both Pyongyang and Beijing told Reuters last July that the North was gearing up to experiment with agricultural and economic reforms. However, nothing was announced and then North Korea conducted a long-range missile test in December and its third nuclear test in February, prompting fresh U.N. sanctions.
A pro-Pyongyang newspaper last week said North Korea, which has suffered chronic food shortages, had a surge in agricultural production due to a new pay-based incentive system for farmers last year.
The World Food Programme, which has an office in Pyongyang, said it was not aware of any changes in agricultural policy.
LUXURY CARS AND FANCY WATCHES
Across the border, it's hard to gauge the impact of deepened economic ties with China.
A child nutrition survey in 2012 carried out by North Korea with U.N. assistance showed results in North Hamgyong province, which abuts Jilin, that appeared better in some cases than in South Hamgyong, next to Pyongyang. The usual assumption is that North Koreans live better the closer they are to Pyongyang.
Marcus Noland, senior fellow at the Washington-based Peterson Institute for International Economics, said that might suggest an impact from increased interaction with China. There was also talk of a building boom in Chongjin, North Hamgyong's capital and the country's third biggest city, he said.
"The economic integration with China is proceeding," said Noland, an expert on North Korea's economy.
"If it really appears that the Chinese are having an impact up in North Hamgyong I think that will probably spur some sort of internal debate, though probably not a very public one, about what should North Korea's relationship to China be."
One recent Chinese visitor who has done business in Chongjin said well-connected North Koreans preferred to ride in Mercedes Benz cars, wore fancy watches and spent hundreds of dollars on mobile phone bills each month.
Park said the North Korean elite were finding ways to tap into China's economic might.
"If you look at the most senior members of the North Korean regime they are really engaged in business and commerce. You have a situation where, in a way, the elites in North Korea are now trying to leverage their positions of power to monetize them," he said.
END OF THE ROAD
After the Chinese border city of Hunchun, the four-lane G12 expressway narrows into a smaller road leading to the Quanhe border crossing.
On the other side of the Tumen River that divides the two countries, the dirt road from the Rason economic zone to China was finally paved last summer. Chinese state media called it a big step in Rason's development.
Jin Qiangyi, director of the Center for North and South Korean Studies at Yanbian University, said he believed the two-lane rural road was originally slated to be a highway. Its downgrade reflected uncertainty about the ability of companies to transport enough cargo to make it economical.
"From the economic angle I don't think there are many people very enthusiastically investing in North Korea. There's too much risk," said Jin.
Still, China's leaders have little choice but to stick with the economic integration strategy, Jin said, even as North Korea pushes up tensions on the Korean peninsula to their highest in decades.
Work is even under way on multi-billion dollar projects to extend bullet train lines to Dandong and Hunchun. The Dandong link is slated for completion in 2015.
"You can't say they've failed yet," Jin said. "But they haven't succeeded." (Additional reporting by Charlie Zhu in HONG KONG. Editing by Dean Yates)
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