By Jeremy Laurence and Jack Kim
SEOUL (Reuters) - North Korea's new leadership under the inexperienced Kim Jong-un appears to be functioning "relatively smoothly," but he has to look beyond key ally China to rebuild its shattered economy, South Korea's senior most official on the North said on Monday.
Unification Minister Yu Woo-ik told Reuters that despite Kim Jong-il's sudden death last month, the secretive North had clearly been well prepared for the handover to a third generation of the Kim family.
"The succession of power has been stable and well prepared," Yu said in an interview.
"It's difficult to predict the future, but for the time being it is likely they will focus on consolidating power internally and to appear stable to the outside world."
Rumors swirled in markets this month about a possible coup in North Korea, but the South dismissed them as groundless. Yu said on Monday the new leadership appeared to be stable.
He, however, said that given Kim's age -- he is believed to be in his late 20s -- and inexperience there remained questions about whether he could do "the job right."
"But having lived as a successor in a regime like North Korea itself is a significant experience. He may be young, but age should not be a big problem," said Yu, although he conceded South Korea knows little about the man the North dubs the "supreme commander."
He said the North would seek to build a cult of personality around the young Kim, similar to that which made Kim Jong-il and the state founder's Kim Il-sung into god-like figures.
Yu said the young Kim did not yet appear to have the kind of absolute control that his father and grandfather wielded, saying a small band of trusted minders were playing an important role in supporting and influencing his leadership.
He did not elaborate on the makeup of the inner group of leaders, believed to include Jong-un's uncle and aunt and the military chief. A source with close ties to Pyongyang and Beijing told Reuters last month the North will shift to collective rule from a strongman dictatorship.
"It's difficult to predict what form their role will take," said Yu. "What's important is to think about what sort of help we can offer to encourage them to make changes to stabilize itself."
SEOUL, NOT BEIJING, KEY TO ECONOMY
Yu said Kim's policy choices to stabilize the economy were more important than personal factors in cementing his grip.
Some 30 years ago, the North's centrally planned economy was more vibrant than that of the South, but since the disintegration of the North's then-ally and benefactor, the Soviet Union, the economy has all but collapsed.
North Korea's nominal gross national income (GNI) amounted to 30 trillion won (US$26.5 billion) in 2010 - only 2.56 percent of South Korea's GNI of 1,173 trillion won, South Korea's central bank says.
Yu questioned China's role in rebuilding the economy, saying its influence was limited to the political sphere. Only Seoul, he said, could help save the impoverished state from ruin.
Beijing, the North's main ally and benefactor, has encouraged the North to follow its model of economic reform.
"China obviously wants the North Korean regime to be stable ... To ensure the North's economy does not fall apart, China will invest in the border region and encourage trade, but it is difficult to believe that that will revive the economy."
Beijing provides more than 80 percent of the North's food and oil and has invested heavily as Pyongyang has been subject to international sanctions for nuclear and missile tests.
Over the past year, China has also backed Pyongyang's plans to open special economic zones on its border.
Yu said the North was well aware that only Seoul can offer substantive help, even though the Koreas remain technically at war, having signed only a truce to end the 1950-53 Korean War.
"It is South Korea that has the experience of rebuilding a shattered economy. It is South Korea that understands the risks of rebuilding, and is prepared to take that risk.
"There will be considerable political help from China, but I believe economic assistance will be limited."
HOSTILITIES OR DIALOGUE?
Yu said the North's new "great successor," appeared focused for now on building a militaristic image, and may stage a hostile act to firm up his power base.
"I think a military provocation is a possibility as a way to deflect responsibility if its failure to revive the economy is revealed," he said.
The North has stepped up its rhetoric against the South and Kim has been shown touring military sites in what analysts say is likely aimed at burnishing a hardline image with the army.
On Monday, the North's state media ridiculed South Korean officials, including Yu, as "confrontational fanatics" and "moral imbeciles" who missed the chance of engaging in dialogue when Pyongyang reached out last year for talks.
Yu dismissed the rhetoric and held out an olive branch to the North's leadership, saying Seoul would consider a resumption of food aid if Pyongyang returned to the negotiating table.
"We can discuss the matter of large-scale food aid, including rice, if North-South talks reopen," said Yu, adding no "meaningful" contact had occurred since Kim Jong-il's death.
The South's President Lee Myung-bak cut off all economic aid to the North upon winning office in 2008, demanding Pyongyang's complete denuclearization for the resumption of aid, which amounted to around $4.5 billion the preceding decade.
"The world is changing fast, and it's inconceivable that North Korea will do nothing to solve its problems by waiting," said Yu. "And I expect the North will make the right choice for our common future."
(Writing by Jeremy Laurence; Editing by Ron Popeski)