The market exchange rate between the North Korean won, the Chinese renminbi (RMB), and the US dollar (USD) has looked remarkably stable over the past few years. Particularly striking is its stability during the 18 months of sharp US-DPRK tensions followed by diplomatic warming, suggesting that some sort of stabilization measures seem to be in force. It would make sense to assume, because of the overwhelming predominance of China among North Korea’s trade partners, that the regime somehow maintains a currency peg to the Chinese RMB. Yet, looking at market exchange rate data, we find that the won actually fluctuates more against the RMB than the USD. This finding is counterintuitive, but it isn’t wholly illogical or impossible to explain. On the face of it, the data doesn’t prove that the won is pegged to the RMB. We maintain, however, that given the North Korean context, a peg to the RMB still makes the most sense, and that the data doesn’t disprove it either.

Whatever factors may be at work, North Korea’s exchange rate stability implies that the regime has important tools at its disposal to ease the effects of economic sanctions. Sanctions could have caused hyperinflation, for example, with social unrest following. To date, this hasn’t happened. In general, North Korea’s exchange rate stability suggests that the country’s economy is more resilient towards outside shocks than many believe. Regardless of whether or not the won is pegged to the RMB, the exchange rate stability signals a somewhat puzzling calm, rather than panic, within North Korea’s economy.

Read full article.