Chinese currency and US dollars are being used more widely than ever in North Korea instead of the country’s own money, a stark illustration of how much the state under North Korean leader Kim Jong-un has lost control over the economy.
The use of US dollars and yuan has accelerated since a disastrous revaluation of the North Korean won in 2009 wiped out the savings of millions of people, experts said.
On the black market, the won has shed more than 99 percent of its value against the US dollar since the revaluation, according to exchange rates tracked by Daily NK, a Seoul-based news and information site about North Korea.
North Korea is one of the most closed countries in the world, so it is difficult to determine what impact this could ultimately have on Kim’s regime.
However, experts said the growing use of foreign currency is making it increasingly difficult for Pyongyang to implement economic policy, resulting in the creation of a private economy outside the reach of the state that only draconian measures could rein in.
For now, Pyongyang appeared to be capitulating, rather than trying to stamp out foreign currency use, they said.
Estimates of how much hard currency is in circulation vary, but an analyst at the Samsung Economic Research Institute in Seoul put it at US$2 billion in an April study, out of an economy worth US$21.5 billion, according to some assessments. Pyongyang does not publish economic data.
The use of US dollars and yuan is now so pervasive there is little Pyongyang can do about it, said Marcus Noland, a North Korea expert at the Peterson Institute for International Economics in Washington.
The government would increasingly have to force people to provide goods and services to the state and get paid in won, Noland added.
“It’s been a tug of war for 20 years where the state would like to get control of the economy, to quash the market and to get everyone to use the North Korean won, but it just doesn’t have the capacity to do any of those things,” he said. “It just makes it harder and harder for them to govern. Nobody wants what they’re selling.”
In the Chinese town of Changbai in Jilin Province, just across the border from the hardscrabble North Korean city of Hyesan, one Chinese trader said North Korean officials he dealt with wanted yuan more than anything else, even food.
Pyongyang has waged periodic campaigns to try to stop the use of foreign currency, but with no success.
North Korea made circulating foreign currency a crime punishable by death in September last year, the Paris-based International Federation for Human Rights said in a report last month.
“I have heard multiple stories of people hiding foreign money under the floorboards in the house, or burying it up the hill in the woods out back,” said one person in northeastern China who has lived in Pyongyang and regularly interacts with North Koreans. “Nobody puts it in the bank because nobody trusts the government.”
Faith in the North Korean won crumbled when Kim Jong-un’s father, late North Korean leader Kim Jong-il, ordered the sudden revaluation of the currency in November 2009.
The government chopped two zeroes off banknotes and limited the amount of old money that could be exchanged for new cash. The move, seen as an attack on private market activity at the time, spurred a rush to hold hard currency.
It also quickened inflation and according to South Korea’s spy agency, sparked rare civil unrest in one of the world’s most entrenched authoritarian states after North Koreans realized the won was not a safe store of value.
US dollars have circulated in North Korea for decades, but the rise in the use of yuan is a more recent phenomenon and reflects a surge in trade and smuggling between North Korea and China along their 1,400km land border, where a lot of the currency changes hands.
Black market rates illustrate how far the won has fallen since the revaluation. It has plunged from 30 won to US$1 to about 8,500, according to exchange rates tracked by Daily NK. The current official exchange rate is about 130 won per US$1.
In border areas, about 90 percent of transactions occur in hard currency, said Christopher Green, Daily NK’s manager of international affairs. Elsewhere, foreign cash accounts for between 50 and 80 percent of transactions in private markets, he estimated.
North Koreans increasingly did not refer to prices in won, Dong Yong-sueng, senior fellow at the Samsung Economic Research Institute in Seoul, wrote in April.
Prices were marked in US dollars for beer, university preparation courses and apartments, he wrote.
South Korea’s central bank estimated foreign currency in circulation at US$1 billion in 2000. Dong reckoned US$2 billion in foreign cash was now sloshing around the economy. About half was in US dollars, 40 percent in yuan and 10 percent in euros, he said.
He said the North Korean informal economy was now bigger than the formal, state-led economy.
“Without foreign exchange, the economy would stop functioning,” Dong said.
US officials have previously accused North Korea of making extremely high-quality counterfeit US$100 notes. This money is believed to have been used to raise real cash for the regime abroad rather than being cycled into the economy.
Ordinary North Koreans wanted yuan, while the elite preferred dollars, said Yang Moon-soo of the University of North Korean Studies in Seoul, who has carried out a study on the use of both currencies.
One official at a European embassy in Pyongyang, who has been visiting North Korea for more than a decade, said the most noticeable change had been the increased use of yuan. Most shops carried prices in dollars, yuan or euros, the official said.
“People ... pay in yuan at the market for rice and other daily necessities,” said Ji Seong-ho, a defector living in South Korea who stays in touch with friends in the North.
An estimated 70 percent of defectors in South Korea also send cash back to family in North Korea, according to the Organization for One Korea, a South Korean support and research institute on North Korean defectors.
A Reuters report last year showed how this money was getting to North Korea via underground agents in China, mostly Chinese of Korean descent. They funnel about US$10 million into the North each year, usually in yuan since the defectors send money to banks in China.
There are small signs some in the North Korean government may be coming to grips with the hard currency reality.
In the Rason special economic zone in the far northeast of the country on the border with China, the government-run Golden Triangle Exchange Bank changes yuan into North Korean won.
The rate — according to people who visited the bank recently — was 1,200 won per yuan, or 7,350 won per US$1. That is a long way from the official rate of 130 won for US$1.
Additional reporting by Narae Kim, Daum Kim and David Chance in Seoul
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