Three years ago, Xu Changyu made his first attempt to get his hands on an island in the South Pacific. The vice-president of China Sam Enterprise Group quietly negotiated a 75-year lease on Tulagi, an islet with a natural deepwater harbour in the Solomon Islands.
The deal was blocked after the attorney-general declared it unlawful, but not without triggering suspicion among the public and the country’s traditional western allies that China was looking to build a military base in a spot that once hosted the British, Japanese and US navies.
Xu would be back. When Solomon Islands Prime Minister Manasseh Sogavare visited China in October 2019, he accompanied Sogavare during the entire trip. In April 2020, he registered China Sam, which produces weapons and has connections with China’s defence ministry, as a foreign investor in the Solomon Islands, removing one of the legal hurdles that derailed the first deal.
Five months later, his company was involved in an even bolder proposal. The premier of another Solomon Islands province received a letter, which purported to be from AVIC International Project Engineering, a subsidiary of a Chinese state aerospace and defence group. The letter said AVIC and China Sam Enterprise Group intended to study “opportunities to develop naval and infrastructure projects on leased land for the People’s Liberation Army Navy [ . . . ] with exclusive rights for 75 years”.
News of the letter was leaked on social media last July and forced the local government chief to deny that anything had been agreed.
But the overtures from the Chinese companies turned out to be a forerunner for something bigger. As revealed through a new leak of documents last month, Beijing and Honiara have drafted a security deal that would allow the Chinese navy to visit Solomon Islands ports for logistics, replenishment and personnel rotation.
The agreement has yet to be signed. But the draft and Xu’s efforts that preceded it have revealed two things. First, they leave little doubt that China is seeking a naval foothold in the southern Pacific as it tries to challenge the dominance of the US and its allies in the region. And second, it demonstrates the complicated way that Chinese companies sometimes act in sync with the government and its geopolitical ambitions.
China Sam Enterprise Group is just one of a growing breed of Chinese companies scouring the globe in an effort to secure strategic strips of land. In dozens of cases examined by the Financial Times, mostly little-known Chinese investors have proposed taking long leases or have tried to buy large chunks of land, often in sensitive locations. In some cases, the land is close to US allies or military installations, on islands along key sea lanes of communication, or overlooking important straits and channels.
The motivations and government connections of these companies are often open to interpretation. In some cases, they appear to be genuine examples of private sector entrepreneurship mixed with opportunism, while in others there are obvious links to the state.
Either way, the impression that many governments have started to build is that these private companies are clearing the way for Chinese state interests that arrive in their wake. They have drawn comparisons with what in the era of the British empire was sometimes known as “trade follows the flag”, the close ties that existed between commerce and colonial expansionism.
“You could say that these Chinese companies are like the British East India Company of our days,” says a south-east Asian diplomat. “They are the vanguard of their nation’s push into new markets and new spheres of influence.”
Solomon Islands
China Sam Enterprise Group
Beijing-based conglomerate founded in 1985.
Ownership Controlled by Xue Dongping and Guo Siying, who are mother and daughter, through investment vehicles. A minority stake was recently acquired by investment company TusHoldings.
State/military links One of its companies, China Jing’an, was founded as a subsidiary of the Ministry of Public Security. The group produces and trades in weapons from pistols to patrol boats. China Xinxing, also identified as a group “affiliate”, provides construction, logistics and other supplies for projects abroad on behalf of the Ministry of Defence.
Business Oil and gas, chemical products, private security services, production, import and export of weapons, propaganda film production.
In Solomons Proposed a 75-year lease of Tulagi Island and later a 75-year lease of land in Isabel for “naval and infrastructure” projects for the PLA. Registered as a wholly owned company in 2020 — Sam Investment (Solomon Islands) Co. Ltd. Business’s scope given as “oil and gas”, but no known projects in this sector in the country so far. Project status: not realised.
Xu, who heads the company’s Solomons business, declined to speak to the FT for this story. China Sam did not respond to emailed questions. AVIC also did not respond to emailed questions.
As geopolitical competition between China and the west intensifies, the US and its allies are struggling to respond to this unique symbiosis between Beijing and its corporate sector overseas. During the cold war, western powers retained their dominance of the Pacific by demanding that the region’s island nations refrain from taking aid or allowing embassies from the Soviet Union.
“That strategic denial approach, which worked with the Soviet Union, is not working with China, and that’s because their companies were there even before the state came,” says Tarcisius Kabutaulaka, an associate professor at the University of Hawaii, who researches China in Oceania and is a Solomon Islander himself.
Business before diplomatic relations
One of the striking features of the Chinese land-buying efforts is that some of the companies have been pitching deals in countries that do not even have a Chinese embassy because they maintain diplomatic relations with Taiwan. China claims Taiwan as part of its territory, and crushing its de facto independence and international links is one of Beijing’s core interests.
The Solomon Islands, for example, switched recognition from Taipei to Beijing only in 2019. But China had become its largest trading partner much earlier, and key Chinese companies, including state-owned contractors, were on the ground and cultivated relationships years before the switch. China Civil Engineering Construction Corporation, a state-owned contractor, set up a local presence in 2015.
A similar pattern can be observed in Central America and the Caribbean, where Taipei has some of its last remaining diplomatic partners.
In El Salvador, Asia-Pacific Xuanhao, a Chinese conglomerate, proposed in 2018 to lease La Union, a port originally built with Japanese money, for 50 years and expand it. At the same time, the Chinese government was negotiating to have the country switch its recognition from Taipei to Beijing.
Subsequently, APX expanded its proposal to include building a string of special economic zones, which would require a 100-year lease on almost a sixth of the country’s territory and half of its coastline, according to APX presentations reviewed by the FT. APX declined to comment.
Although El Salvador’s then president Salvador Sánchez Cerén pushed custom-made legislation to enable the proposal, the grand plans soon became stuck. As the US government campaigned against Chinese influence in Latin America, El Salvador’s parliament banned the sale of islands to foreign investors, blocking control over key areas off the Gulf of Fonseca coast.
However, other Chinese investors have tried to help push the economic zone project. According to government documents and local news reports, Yang Bo, a Chinese-born trader and investor who came to El Salvador after Beijing’s bloody suppression of the 1989 student movement in Tiananmen Square, acquired more than half of the land on Isla Perico, an island close to the port theoretically covered by the ban.
Yang did not return calls seeking comment.
The persistent push by different Chinese actors for what would be long-term control of large tracts of land has sparked a vigorous debate about what these companies are really up to.
“We have seen Chinese non-state actors move in unison to help China gain economic and political influence in Central America,” says Evan Ellis, a professor at the US Army War College Strategic Studies Institute who follows China’s engagement with Latin America. He sees approaches such as those by APX and Yang as part of strategic Chinese plans to develop trading routes across Central America as alternatives to the Panama Canal.
However, other analysts, executives and diplomats say that viewing Chinese companies as simply a front for Beijing’s geopolitical or military interests is far too simplistic and often outright wrong.
“How do you unpack what is intent and what is accident?” asks Graeme Smith, a fellow at Australian National University, who is building a database on Chinese companies active in the Pacific. He says many private Chinese companies try to get into the lucrative business of overseas development projects financed with Chinese government money by what he calls “reverse-engineering” — proposing a deal on the ground that might appeal to the host country and then seeking support from Beijing.
“Chinese companies find a local politician or senior bureaucrat they pitch a project to. They make it appear like there’s a local interest. Then they go back to China Eximbank, to a big state-owned enterprise, or to the government, and sometimes things come to fruition.”
Strategic sea lanes
Another striking feature is the astonishingly ambitious plans that some of these companies have proposed — even though most have almost no record of developing similar projects. Several of those have run aground very quickly.
In August 2019, Fong Zhi, a joint venture between a Chinese real estate conglomerate and ethnic Chinese investors in the Philippines, offered to acquire control over Fuga Island in the Luzon Strait and build a “smart city” there — a project involving information technology that can be used for public services such as surveillance or traffic control.
Located in the channel that separates the southern tip of Taiwan from the northernmost Philippine territories, Fuga is highly strategic as both PLA Navy vessels and ships of the US and its allies pass through when transiting between the South China Sea and the Pacific.
Spurred by Philippines lawmakers’ demands for an investigation, the military required a review of the proposed investment and has since announced plans to build its own naval station on Fuga.
Two other Chinese companies were planning to develop special economic zones on Chiquita and Grande, two islands off the Philippines’ west coast in the South China Sea, waters both Manila and Beijing claim as their own. Security concerns in the Philippines have put those plans on hold too.
In late 2020, a Chinese company proposed creating a fisheries zone around Daru, an island in the narrowest part of the Torres Strait that separates Papua New Guinea from northern Australia. A few months later, a separate Hong Kong-listed group with links to the mainland pitched building a smart city in the same impoverished backwater. Both plans have evaporated.
Philippines
Xiamen Hongji Yongye Investment
Xiamen-based company founded in 2017.
Ownership Owned by Xiamen entrepreneurs Lai Xiaoyi and Hong Zhiqiang, who is also involved in a Beijing electronics firm.
State/military links No known links.
Business Trading in mechanical and electrical equipment, hardware and solar power installations, import and export trade, investment.
In Philippines Fong Zhi Enterprises (Phils), joint venture between Hong, a relative of Lai, a Filipino entrepreneur of Chinese descent, and two other ethnic Chinese Filipinos. It was registered in 2017 in Cavite, Philippines, as an industrial equipment and wholesaling business. It has proposed a $2bn “smart city” project on Fuga Island. The company is dormant and the project not realised.
“They are just throwing stuff at the wall and hope that one is going to stick,” Smith says. “There is no easier money than doing a construction project abroad with Chinese money, and that’s why so many of them are trying for it.”
The FT examined more than 30 reports of Chinese proposals for large-scale development projects around the world over the past decade, and did a more detailed investigation with analysts at Janes, the open-source intelligence group, of nine projects proposed or implemented in the past four years. The Chinese would-be contractors in that smaller sample are private companies controlled by a small number of shareholders, often members of one family.
“One pattern you can observe is that these are people with a strong entrepreneurial streak,” says Claire Chu, a senior analyst with Janes.
China Sam Enterprise Group, for example, is controlled by two people — Xue Dongping and Guo Siying — through a web of intermediate shareholding entities.
The Chinese investor in Fong Zhi, the company that proposed the Fuga deal, is Hongji Yongye, a Xiamen-based group whose two private investors also own various other small businesses involved in areas such as electronics trading and catering in China.
Fong Zhi’s shareholders did not respond to requests for comment.
Another typical example is the Chinese company driving a $3.8bn economic development zone in Cambodia, which takes up a fifth of the country’s coastline and includes an airport with a military-grade runway. UDG, the Cambodia-registered project company, is owned by Tianjin Union Group, whose parent, property developer Wanlong Group, is controlled by a family of one parent and four siblings with two other associates.
Cambodia
Tianjin Union Investment Development Group
Tianjin-based real estate company established in 1993.
Ownership Controlled by local entrepreneurs Cai Chen, Peng Jianghai, Li Fengjun and his three children. This beneficial ownership is obscured by a web of six vehicles sharing ownership.
State/military links No known military links. The company has promoted policies linked to the Belt and Road Initiative, including promoting cultural exchange and language teaching with Cambodia. UDG was sanctioned by the US for alleged human rights violations in expropriating original residents of the area for the Dara Sakor project.
Business Real estate developments in Qinhuangdao and Hainan. Parent Wanlong Group used to focus on residential and commercial developments, with a recent shift to tourism real estate.
In Cambodia Established wholly owned local subsidiary UDG. Building the Dara Sakor Seashore Resort and eventually the “Cambodia-China Comprehensive Investment and Development Pilot Zone”. Has a 99-year lease for the area, including 20 per cent of the country’s coastline.
Private ownership control, however, does not mean that the state is absent. Several of the privately owned Chinese companies reviewed by the FT for this story had close links to China’s security forces or to other parts of the state apparatus.
According to tender documents and Chinese media reports, APX is a supplier of night sight goggles, telescopes and listening equipment for the People’s Liberation Army and the paramilitary People’s Armed Police. When the company set up its Communist party branch — required from all enterprises in China — it did so with National Defence University, a PLA institution. In China, some private companies like to show connections to the military to demonstrate their patriotism and pursue state business.
China Sam Enterprise Group, too, has deep state and military links. Despite its private ownership, China Sam describes itself as a “state-level” company — a label that carries no official meaning but evokes associations of state-owned enterprises. One of its main subsidiaries, China Jing’an, was owned by the Ministry of State Security before a 2017 asset transfer made it a subsidiary of China Sam. China Jing’an is a private security contractor and has a licence for importing and exporting weapons, including guns, ammunition, armoured vehicles, robots, drones and explosives, according to Janes.
Analysts say that in the course of Beijing’s general shift towards more state control across Chinese society and the economy, the government is instructing state-owned companies more strictly to act in support of its foreign policy goals.
El Salvador
Asia Pacific Xuanhao Group (APX)
Beijing-based conglomerate established in 2004.
Ownership 100 per cent owned by Wang Chengbin, an entrepreneur with interests in several other companies in project management, construction and financial investment.
State/military links One affiliate registered in the building of a research institute for China’s paramilitary force, the People’s Armed Police, in charge of riot control and border protection. Another affiliate has a joint venture with a state-owned weapons producer. APX supplies the police, PAP and the military, and set up a Communist party branch with the National Defence University.
Business Production and sales of optoelectronics equipment, weapons machinery, mining, financial investment, fund management, project development and management.
In El Salvador Proposed redevelopment of La Union port and cluster of special economic zones. Project status: pending.
“For 30-odd years, they used to live in an ideology-free world — they would have this attitude that we are here to make money and take the minerals,” Smith says about the handful of state-owned enterprises, including China Civil Engineering Construction, Shanghai Construction Group and China Harbour Engineering, which take a large share of the construction projects financed with Chinese development loans abroad. “But now they are largely expected to carry the water for the Chinese state — that has really changed in the past few years.”
Even ethnic Chinese abroad who are not even citizens of the People’s Republic of China can be pulled into economic diplomacy by Beijing. “The other pattern we see is that members of the local overseas Chinese community are being tapped and can play a crucial role,” Chu says, referring to Yang in El Salvador. Apart from purchasing land for the proposed special economic zone cluster, Yang has also received trade and investment delegations from China on behalf of the Chinese embassy.
For the western governments who carefully monitor every Chinese move, it is unsurprising that they see these Chinese companies through a simple geopolitical lens.
Given this complex mix of actors, however, things are more difficult for the governments in many of the developing countries that Chinese companies are targeting with their proposals.
Kabutaulaka warns that Solomon Islands officials lack sufficient knowledge about the responsibilities and financial powers of various Chinese institutions, both private and public, to understand who they are dealing with. Solomon opposition politicians go even further. Matthew Wale, a lawmaker and leader of the opposition Democratic party, claims that some members of parliament “have been bought by Chinese companies”. He adds: “We are in a state of elite capture.”
The response of some Solomon Islanders is even starker. One member of a local anti-corruption group on Facebook reacted with shock to the revelation that China Sam had come back last year with yet another proposal for leasing land for 75 years. “Are they looking at turning Solomon Islands into a colony?” she wrote. “What does this mean for our future and our children?”
Copyright The Financial Times Limited 2022
