Why China imposed a ban on North Korean coal imports

Update II: Just read Yonhap's latest report on China's January 2017 coal import volume from DPRK. I did some quick back of envelope calculations to test our hypothesis that potential coal price changes and frontloading could bring China close to the $400M/7.5M ton cap quickly. Assuming coal prices in January of around US$92 and Yonhap's figure of 1.44M tonnes of imports in January, at constant price, China would be at about 66% of the cap by end of February 2017. If coal prices in February rise by 20% and import volume remains constant, China would be at 72% of the cap. That's between two thirds and three quarters of the way to reaching their $400M value limit. Given the way commodity prices are moving and China's cap on domestic coal production, an increase in coal prices is possible (but uncertain).

Bear in mind that this is using thermal coal prices. If we assume 100% coking coal prices at US$200/ton, China probably already reached their cap in February 2017.


There has been a lot of speculation around what China’s import ban on North Korean coal for 2017 means. Does this mean that China is finally coming around to the US position? If there is any doubt about that, the public disagreement in the US-China Munich meeting should dispel it:

“China just keeps on telling you this is not working, although we’re going along with you,” Fu Ying, who chairs the Foreign Affairs Committee of China’s legislature and was a vice foreign minister until 2013, said at the Munich Security Conference. “You have to realize -- without talking with them, you will only drive them in the wrong direction further.” - Bloomberg

I think this accurately reflects the Chinese view, in which they increasingly see a lack of willingness on the part of the US and South Korea to consider North Korea’s security concerns as legitimate and to address it as such as the root cause of the problem. Rather than coming closer, China and US positions have been drifting apart.

So the question is why impose a ban now? Coming on the heels of Kim Jong Nam’s alleged assassination and a North Korean missile test, some have tried to link these to the timing of the ban. While that may be possible, more administrative factors are at play.

When the UN Security Council imposed the cap on coal trade, China was left with the question of how such a cap could be implemented. Would there be an auction system for quotas? Is it able to track forward contracts or does it only know belatedly the level of coal trade after import figures come out? This problem came to the fore last year when the Chinese were unable to meet their commitments regarding the import cap as they wrestled with these problems.

China has generally chosen to ensure adequate flexibility in the wording of UNSC sanctions to give it wiggle room, rather than outright violating those rulings. Allowing a coal cap to pass at the UNSC indicates their willingness to adhere to the ruling. In imposing a ban for 2017, China probably took into account rapidly rising coal prices and a probable rush by companies to frontload sales ahead of the cap to predict that the coal cap would be breached far earlier in the year. Rather than risk a violation of the coal cap limit, China is proactively clamping down on trade.

Domestic concerns might also play a part. China is restricting domestic production of coal. Between domestic producers and North Korean ones, China obviously prefers the former.


Update: Bill Newcomb of USKI at John Hopkins sends us the following viewpoint: "In my view, emphasis on administrative motivation is misplaced. One, not a large number of Chinese coal importers; two, China is not unfamiliar with various import control techniques; three, using an on-off switch rather than license/quota type system deprives authorities of guangxi leverage. Political shock & awe, on other hand, is unmistakable signal of top level loss of patience. While US & UN approaches, both soft & hard, have been roundly criticized as not working, point rarely made that Beijing's coddling of DPRK also has not worked and likely even encouraged Pyongyang to continue on its dangerous path--a problem of moral hazard." Thanks! Also, check out the Peterson Institute for International Economics take on this.