* North Korea says Chinese firm failed to honour investment
* Rare attack on China by North Korean official and state
* Move comes as North Korea's leader asks for China visit
* Xiyang tells Reuters it was "cheated", says Beijing's
* Attack shows North Korea's unease over China
By David Chance and David Stanway
SEOUL/BEIJING, Sept 5 North Korea attacked
charges on Wednesday that it was a "nightmare" to do business
in, complaints that threaten desperate attempts to boost
investment from solitary ally China to help repair its broken
The extremely unusual attack underlines the reclusive
state's sensitivity over an increasingly heavy dependence on
China and comes as Pyongyang's new leader Kim Jong-un seeks a
state visit to Beijing to plead his case for investment
The rebuttal, in a statement on North Korean state news
agency KCNA, follows very public comments by Chinese miner and
steel manufacturer, the Xiyang Group, which described its
investment in an iron-ore powder venture there as "a nightmare",
accusing the North of violating its own investment laws.
Xiyang told Reuters in an interview after the North's
statement that it had been "cheated" and it lambasted Beijing's
policy of propping up North Korea's unreformed regime which it
said that it was done for geo-political reasons.
"It (Xiyang) has carried out only 50 percent of its
investment obligations though almost four years have past since
the contract took effect," KCNA quoted a spokesman for North
Korea's Commission for Joint Venture and Investment as saying.
Xiyang refused to curb its criticism of North Korea when it
spoke to Reuters, suggesting that Beijing was doing little to
help companies that ran foul of what it viewed as arbitrary
rulings by North Korean officials.
"This isn't just about us - it is about all companies
investing in North Korea," Wu Xisheng, vice general manager of
Xiyang told Reuters.
"They just don't have the conditions for foreigners to
invest. They say they welcome investment but they don't have the
legal or social foundations."
The complaints underline the difficulty of doing business in
one of the world's most isolated and impoverished countries.
And they come amid a welter of criticism of the North, whose
economy is smaller than it was 20 years ago according to United
Nations data, and where hard-nosed Chinese businessmen have to
contend with Beijing's desire to prop up its ailing neighbour.
"The Chinese government can do nothing - it is thinking more
about political stability," said Xiyang's Wu.
Asked about the issue, China's Foreign Ministry spokesman
Hong Lei gave a muted response, saying the government continued
to encourage Chinese companies to invest in North Korea.
"Regarding some problems that occur in the process of
China-North Korea cooperation, we hope the two sides can
appropriately handle and resolve them," he told a regular news
North Korea almost never criticises its neighbour or any
Chinese entities in public. The KCNA article said the comments
had been whipped up by "hostile forces" in an orchestrated media
campaign to blacken the isolated state's name.
North Korea has for years pursued a "military first" policy
that critics say has impoverished its people while developing
one of the world's largest armed forces and spending money on
developing a nuclear deterrent.
It has been it sanctioned and largely cut off from the
international economy in punishment for its nuclear programme.
Despite sitting on potentially trillions of dollars of
mineral reserves ranging from gold, to iron ore and rare earths
as well as uranium, all but the bravest investors have been
deterred by a North Korea's toxic economic environment.
Between 2003 and 2009, Chinese investment in North Korea
stood at $98.3 million, just 12 percent of the amount Chinese
firms have invested in South Korea, according to Chinese data
cited in a 2011 report by Drew Thompson, a Korea specialist who
now works at the U.S. Department of Defense.
Thompson said in his report, the most detailed on the
subject, that Chinese investments were "smaller and less
successful than projects in neighbouring states" due to "rent
seeking, poor infrastructure and the oppressive political
A recent trip by Reuters to Dandong, a Chinese town on the
North Korean border, showed that while traders were hopeful of
an opening under Kim who is believed to be in his late 20s and
became the third of his line to rule, little had changed.
"I sell mainly autos and from what I see every year they buy
fewer and fewer. The demand there gets smaller every year," said
a trader in Dandong who refused to give his name due to the
sensitivity of the cross-border trade.
GROWING DEPENDENCE ON CHINA
North Korea's official ideology is based on economic
self-dependence but in reality it has been unable to feed its
population for decades, plant and equipment lies idle due to
lack of electricity and much of it is too old to be of use.
Adding to its problems, reports are increasing that this
year's grain harvest, never enough even in good years, has been
badly hit by poor weather.
Sanctions, the collapse of the Soviet Union and a freeze in
relations with prosperous South Korea have forced it into
China's arms and in 2011, 89 percent of the North's trade was
with its powerful ally, exluding operations in an economic zone
with South Korea, which is counted as internal Korean trade.
"Kim Jong-un more than any of his predecessors needs
economic success for his political legitimacy. This implies
measures to make the economy more efficient - i.e. reforms,"
said Frank Rudiger a professor at Vienna University and an
expert on North Korea.
"As much as they need it... North Koreans are very, very
suspicious of the massive onslaught of Chinese investment,
trade, business people, goods and services," he said.
Stung by the Xiyang criticisms the investment authority
statement on Wednesday said there would be more reforms to
"ensure the legitimate rights and interests of all investors",
but it did not specify what those reforms could be.
Earlier this year, Pyongyang unveiled new investor
incentives for the Rason economic zone that sits next to China,
including longer leases, the right to choose who to hire and
what to pay them, as well as tax incentives.
This was the sixth revision to the laws governing Rason
since its inception in 1993, according to specialist North Korea
website 38North (www.38North.org) and a separate announcement on
Wednesday that the North's rubber stamp parliament would hold a
second session in September could mean more reform measures.
However, there is a limit as to how far Pyongyang is
prepared to liberalise, fearing that unfettered investment could
destabilise the Kim dynasty.
Last month, Jang Song-taek, Kim's uncle, visited Beijing to
ask for new investment and to try to get China to agree to a
state visit for the new leader.
China has not responded to the requests and the North's
attack on a company linked to the government of a Chinese state
bordering North Korea could make Beijing think twice about
relations with its neighbour which irritated its backer with its
two nuclear tests and a failed rocket launch in April.
"Coming in the wake of a pretty unsatisfactory visit to
China by Jang Song-taek, this is a very public message of excuse
as well as pressure that shows it does not like being humiliated
and that North Korea is not a vassal of China," said Yoo Ho-yeol
expert on North Korea at Korea University outside Seoul.