Small Chinese Shippers From Troubled Ports Seen Aiding North Korea Trade

LINHAI, China -- Some of the Chinese ships U.S. authorities allege have helped North Korea evade trade sanctions sailed from ports like this, a depressed shipbuilding town.

Just a few years ago, locals in this eastern China town say, it was popular for residents to pool money and buy ships as they scrambled for a piece of an export boom driven by the region's factories.

Today, Linhai's muddy riverbanks are dotted with cargo vessels abandoned in mid-construction, evidence of financial stress among Chinese shipowners who expanded tonnage 2.5 times in the decade to 2016.

The Kai Xiang, a bulk carrier with three cranes and an orange hull, launched from a Linhai shipyard in 2012, owned by six locals. One of the six, Cui Shiwei, said the ship proved nearly impossible to monetize amid slack global trade, and dragged the owners into debt.

"Running this business shattered my family," said Mr. Cui. Business records show he transferred his stake to another partner in 2016.

The industry's struggles provide a backdrop to intelligence gathered by U.S. officials that the Kai Xiang and five other Chinese-owned or managed ships helped North Korea sidestep United Nations sanctions imposed in 2017. They did so, according to the U.S. intelligence, by hauling illicit cargo to Russia and Vietnam or making ship-to-ship transfers at sea, The Wall Street Journal reported this week.

The ownership and management of the six vessels included shell companies in Hong Kong and business and residential addresses in mainland China, according to shipping registries and corporate and other publicly available records.

The six ships are workhorses for the cargo and energy industries. Each appears owned and managed by small groups of individuals and unconnected with China's large and mostly state-owned shipping networks.

Most flew foreign flags. The owners of the six vessels were based in ports along the China coast where shipping companies have scraped to get by for most of a decade. Shipyards and shippers that expanded ferociously during the economic boom of the 2000s haven't recovered from a slump after the 2008 financial crisis left the world with too many vessels and not enough trade to haul.

The shipbuilding center of Nantong, up the coast from Linhai, is home to the managers of the Glory Hope 1, another ship alleged by the U.S. to have violated sanctions. One of its two shareholders is a Communist Party member and former port executive, 65-year-old Lu Yuliang.

Shipping was never particularly profitable for Mr. Lu and his business partner, and he sold an apartment to sustain the one-ship operation, according to his son Lyu Cong.

Days after the U.N. in early August banned North Korea from trading coal, the Glory Hope 1 sailed into a North Korean port, loaded coal and then hugged the China coast, ultimately delivering the shipment to Vietnam, according to the U.S., which used satellites and other intelligence-gathering methods to track the vessel.

Mr. Lu was detained by Chinese authorities in late August and faces criminal charges likely related to his trading activities with North Korea, according to his son, his lawyer and the Glory Hope 1's owner.

China's Foreign Ministry has said that Beijing abides fully with U.N. Security Council resolutions and deals with violations in accordance with law. It didn't respond to queries about the vessels mentioned in this article.

Chinese officials have investigated at least four of the six vessels, according to some of the people questioned by investigators.

For small-time shipowners in China, the sanctions were more bad news. Trade with North Korea had been legal -- and was considered just another business opportunity in Asia, according to an official at a shipowner association in Jiangsu Province, where Nantong is located.

Mr. Lu's son said his father had made no secret of the fact that his business had ties to North Korea and included purchasing North Korean coal, often in barter deals.

"If we're looking at it objectively, and ignore nationalities, it's just normal trade," said Mr. Lu's son. "But [North Korean leader] Kim Jong Un always makes trouble. It's all about politics."

In China's border city of Dandong on the Yalu River next to North Korea, another Chinese company owned a ship, the Sam Jong 2, accused by the U.S. of having violated U.N. sanctions.

Dandong Xianghe Trade Co. of China owned the ship, according to shipping databases. The company was one of three sanctioned by the U.S. Treasury in November on allegations they cumulatively exported about $650 million in goods to North Korea and imported more than $100 million in goods from there over a nearly five-year period from 2013, including shipments of notebook computers, coal and metals.

Efforts to contact Dandong Xianghe Trade's owners weren't successful. A lawyer who has represented the company said it has been involved in North Korean trade for years. He said he wasn't aware of the allegations, and that the company hadn't committed any wrongdoing.

Likewise, the Kai Xiang, the Linhai ship, had delivered North Korean coal to Vietnam in June, said a senior executive with a contractor that handled safety management for the vessel.

The Kai Xiang later hauled North Korean coal to Vietnam after the sanctions took effect in August, according to allegations from the U.S. The Kai Xiang's owners couldn't be reached for comment.

At addresses listed by owners on corporate documents, the Journal found dilapidated homes and parents who knew little about their sons' business.

One father said ship ownership saddled his son, 43-year-old Chen Jian, with debt. The father said was aware of his son's trade with North Korea, citing what he called "Trump's sanctions." He called his son, who refused to talk with Journal reporters.

--

Zhang Chunying

contributed to this article.

Write to James T. Areddy at james.areddy@wsj.com and Chun Han Wong at chunhan.wong@wsj.com

(END) Dow Jones Newswires

January 19, 2018 13:08 ET (18:08 GMT)