Premier Wen Jiabao encouraged North Korea to allow "market mechanisms" help revamp its economy, state media said on Saturday, and laid down other pre-conditions as China tries to wean its impoverished ally off its dependence on Chinese aid.
Wen's comments followed his meeting with Jang Song-thaek, the powerful uncle of North Korean leader Kim Jong-un, in Beijing on Friday. Jang is the highest-profile North Korean official to visit China since Kim power in December 2011.
As well as allowing freer rein to market forces, the Chinese premier also recommended Pyongyang encourage economic growth by improving laws and regulations, encouraging business investment and reforming its customs services.
China's President Hu Jintao also met Jang in a clear show of support for the North and its new leadership. Jang is seen as the driving force behind reforms that the isolated and destitute North is believed to be trying and for which it desperately needs Chinese backing.
Beijing has had difficulty managing the relationship with North Korea, which it views as a strategically critical buffer between itself and U.S. military forces in South Korea.
But North Korea is often more cantankerous than China would like, in particular towards South Korea, even though the economic relationship between China and South Korea is far more important. Bilateral ties are also not always smooth.
In May, North Korea seized a number of Chinese fishermen and boats in the Yellow Sea and demanded 1.2 million yuan for their release.
China has expressed unhappiness with North Korea's nuclear weapons programme, particularly with nuclear tests that have been conducted near the Chinese border, and is quietly lobbying against future tests.
Beijing has supported international sanctions against the North in the past, and has also occasionally cut off economic aid, including critical oil shipments, but the desperate state of the North's economy has limited its leverage in Pyongyang.
Experts and government sources who spoke to Reuters say China cannot go too far with such sanctions for fear of destabilising the regime entirely, prompting a flow of refugees across the border into China.
China and North Korea have moved to intensify economic cooperation through development zones in Rason on the North's east coast, and in the border area of Hwanggumphyong.
So far North Korea has received around $300 million in non-financial direct investment from about 100 Chinese companies, mainly in the food, medicine, electronics, mining, light industry, chemicals and textile sectors.
China's exports to North Korea rose 20.6 percent last year to $2.28 billion from 2010, while imports plunged 81.4 percent to $147.4 million, according to Chinese customs figures.
Those numbers are dwarfed by trade with South Korea, China's third-largest trading partner.
(Reporting by Pete Sweeney; Editing by Paul Tait)