South Korea's small and medium enterprises should try to create an industrial park in northeastern China to bypass international sanctions and expand business ties with North Korea, a state-run think tank said Sunday.

In its latest report on the North Korean economy, the Korea Development Institute said Pyongyang has been sending more workers to China to earn more hard currency, which local companies can capitalize on.

North Korea's dispatch of workers to China has increased since Seoul blocked almost all cross-border exchange after the sinking of its naval ship Cheonan in 2013.

Currently, some 600 North Koreans work at factories in the Chinese city of Hunchun, which is ideally situated close to both the Russian and North Korean borders, it said. The city also has a sizable ethnic Korean population and is not far from the East Sea.

The KDI added that it makes sense to build a dedicated South Korean SME industrial complex in the Chinese city as it offers various tax benefits and other incentives to foreign investors.

"By cooperating with Chinese authorities, South Korean firms can employ North Korean workers who are paid less than Chinese counterparts," the KDI said.

The average wage of a North Korean worker in China stands at little over 1,200 yuan ($193) per month.

Products made at such factories should enjoy price competitiveness and could be shipped to other parts of China and the world without restrictions, the think tank said.

The KDI pointed out that investment in Hunchun doesn't require costly infrastructure development because the city already has good roads and other infrastructure facilities. South Korea's steel giant POSCO and Hyundai Group have set up logistics centers in the city.

"More importantly, investment in the city can bypass new investment restrictions imposed by Seoul against North Korea, as well as the United Nations ban on bulk cash reaching North Korea,"

it said. The U.N. ban has been imposed after Pyongyang detonated nuclear devices and fired off long-range rockets.

The KDI said investing in the city can allow local SMEs to take advantage of the low wage and high quality North Korean labor force that can benefit all sides.

Such tie-ups can lead to closer ties between South Korean companies and North Korea and lay the foundation for more economic cooperation down the road, it added. (Yonhap)