Outward Investment and China’s Private Security Empire

J. Andrew Carter, Jr.

Chinese infrastructure investments are booming. In June 2013, the Government of Nicaragua awarded an exclusive 50-year, $50 billion USD contract to the Hong Kong Nicaragua Canal Development Group (HKND) to construct and operate a 259.4 km waterway, connecting the Pacific Ocean with the Atlantic Ocean via the Caribbean Sea, traversing the tropical freshwater Lago de Nicaragua (HKND Group 2014:10-22). The ambitious canal project is expected to be completed by 2020 and is considered the largest civil earthmoving operation in modern history, requiring the excavation of approximately 5 billion m3 of land material (Huete-Pérez et al. 2015:3990-1). The externalities of the project, one of many projects around the globe spearheaded by Chinese firms, can prove to safeguard China’s continued economic expansion into the next 20 years.

Taking into account the density and population of Asia, regions such as Latin America, are crucial and strategic allies for the supply of food, raw minerals and resources, especially oil. The Nicaraguan Canal project embodies the greater strategies employed by the Chinese government, utilizing cost-effective models in the developing Nicaraguan state and locational advantages due to its ability to accommodate large quantities of traded goods, especially between the Chinese and Brazilian markets. The importance in procuring these vital resources for sustained growth is contingent on the ability to effectively secure the private investments, which in the case of the Nicaraguan Canal, comes in the form of exported security services from the country’s rapidly emerging private military and security sector.

Rise of Chinese Infrastructure Investment

Trade liberalization and changes in foreign trade regimes has enhanced the Chinese market-seeking strategy which is increasingly employed and promoted by the Chinese government, where Chinese firms are incentivized to invest abroad by guaranteed political and financial support from the government. Incentives come in the form of government provisions of tax benefits and rebates, investment insurance packages and most importantly, low interest rates on loans arranged by state-owned banks (Deng 2007:72-3). This governmental tactic is statistically reinforced by the higher outward FDI growth rates in China than that of other developed economies and is mirrored in the country’s $52.15 billion outward investments in 2008 (Deng 2007:71, Holtbrugge & Kreppel 2010:5-6,9).

This promotion of outward investment is multi-faceted in the sense that emerging sectors of China’s economy, such as that of private military and security, are encouraged to establish foreign operations and partnerships, especially along Chinese trade routes. The Chinese government actively supports firms in various sectors of the economy to invest in foreign markets, especially in the sectors of infrastructure, resource mining, research and development. Although types of outward investments are diverse, strategic investments through private infrastructure projects have the biggest externalities due to the potential to spur access to new markets. This corresponds with Chinese policy, allowing the government to act on its interest in the direction of global society building despite its historical record of non-interventionism in international politics (UNCTAD 2005/9; Holtbrugge & Kreppel 2010:4; Skak 2011:12).

One of the core components to the broad Chinese investment agenda is the reassertion of the state in the provision of economic development, specifically referencing investments in infrastructure (Ban & Blyth 2015:1). Chinese policies towards foreign investment reflect the notion that adequate physical infrastructure is fundamental in the establishment of sound investment environments. The increasingly limited accessibility to sufficient capital creates financial burdens that prevent the completion or progression of such large-scale investment projects (Kateja 2012:369, Koldunova 2015:5). Therefore, there is a clear initiative to increase the role of the state in the private sector, which arguably, enables state actors to maintain more control of such projects throughout the globe by masking their investment agendas behind that of private actors, giving rise to quasi-private firms with direct state influence and a perceived degree of allegiance to the state.

Does the Private Sector Exist in China?

Modern technology and advanced engineering exhibited through contemporary infrastructure projects can not only rival pre-existing projects, but also have the potential to augment the efficiency and effectiveness of the greater global economy. The profit-seeking nature of the private sector even increases the efficiency of such projects through the elimination of inessential costs, reducing surplus employees, implementing sustainable pricing policies and altogether avoiding public and political influence in the investment decision-making processes (Kateja 2012: 369-71).

However, how “private” are Chinese firms that are constructing,
maintaining and securing infrastructure investments?

The aforementioned Chinese policies regarding the encouragement of FDI constitutes as an extraordinary example of the increased state involvement in private sector business affairs due to the government’s role as the largest private sector majority stakeholder within the domestic Chinese economy. Through the communist regime of the People’s Republic of China, the business sector consists of state-owned enterprises (SOEs), owned directly by the central government where executives are almost exclusively appointed through party ranks; non-state enterprises (NSOEs), owned by township or village governments; and urban, private or collective firms (Deng 2007:72). In 2003, only one of China’s top 500 enterprises was registered as privately owned (Zeng & Williamson 2003). In 2006, 82% of China’s total outward investment was facilitated by SOEs (Morack et al. 2008). This serves as sufficient evidence that the majority of outward private investment by Chinese firms corresponds to the domestic and foreign policy agendas of the Chinese government due to their increased participation in the leadership, financing and facilitation of such projects (Kolstad & Wiig 2009:6).

The potential for the Chinese government to influence the private sector investment agendas of Chinese firms plays a critical role in the case of the Nicaraguan Canal. Not surprisingly, two of the biggest components of the HKND Group are state-owned enterprises: the China Railway Construction Corporation (CRCC) and the Xugong Group Construction Machinery Company. The HKND Group, via comments made by CEO Wang Jing, publically denies any direct influence or partnership with the Chinese government (Der Spiegel 2014). However, there is an implied allegiance considering the degree to which the Chinese government is a stakeholder in various members involved in the project. This is particularly evident considering the diplomatic avenues established with Nicaragua during the negotiation.

Even though the Nicaraguan Canal will likely to operate a commercial “open door” policy similar to that of the Panama Canal, however, there is even more speculative evidence supporting the notion that the Nicaraguan Canal and its security network will be used as a geopolitical tool to bolster trade with China and its allies (Doerr 2015:83). The absence of international law regarding private investment projects will enable the HKND Group to potentially exploit and even deny access to different actors transiting the canal after its completion. Could the perceived allegiance between China and its private sector foster an extension of the state and its military through the construction, facilitation and security of private Chinese investment ventures in other regions around the world?

Securing Infrastructure:
The Nicaraguan Canal and the Rise of Private Security

As aforementioned, the increasing inability for public governments, especially within emerging economies, to finance and supply necessary security for infrastructure needs, has given rise to increased security provisions within contracts to private sector firms. Regarding the Nicaraguan Canal, the provision of security is another critical element of the canal project. The evolving geopolitical climate has led to increased partnerships between the public and private sector through infrastructure. The private partnership between the Chinese HKND Group and the Nicaraguan government through negotiations of a Nicaraguan Canal has provoked a global debate regarding the viability and practicality of such modern infrastructure projects within the international economy due to the emerging role of private, non-state actors in such projects, including that of security.

Due to the international utility of the canal, substantial measures to curb organized crime, criminal activity and terrorism are deeply embedded in the project plans. The limited Nicaraguan military and police capacity will be a major obstacle for the efficiency of the project and highlights the necessity of intelligence-sharing, or coordination with key international partners to establish and maintain the security of the canal (Huete-Pérez et al. 2015:3994). The Nicaraguan government has deployed its national police and military forces to protect and protect HKND personnel and canal assets during the construction stage of the project (Glüsing 2014). The HKND Group further outlined security measures in its initial proposal, citing its anticipation to employ guards and patrol services which would provide waterway security in the canal zone as well as patrol worker camps and maintenance facilities (HKND Group 2014:40,74). This outsourcing of maritime security is troubling, considering the magnitude of security that will be deployed at checkpoints along the canal.

The participation of the private sector in the construction and security of the Nicaraguan Canal project poses a direct challenge to the state influence over other major infrastructure investments and jurisdictional security.

The opaqueness of the HKND security provision poses significant debate on the ability to effectively secure the canal. The ability for the HKND Group to implement its own means of security will grant a substantial degree of authority to any security actor contracted to patrol the newly constructed facilities and inspect tankers utilizing the canal, potentially creating and providing critical intelligence to internal or external networks.

Further complicating the investment project, various state actors in the international community have publically endorsed the security of the HKND Nicaraguan Canal, including Russian Foreign Minister Sergei Lavrov, who pledged military and political support to “guard the construction site against possible acts of provocation” (Paniyev 2014). This could indicate a potential strategic political and security alliance through the project between the Russian and Nicaraguan government and the HKND Group. The alleged support of the Russian government as well as private security provided through the HKND Group is reflective of the amity between Russia and China. While officials of the HKND Group deny of any direct influence or partnership with the Chinese government, there is speculative evidence that the privately constructed Nicaraguan Canal could be representative of the involved actors. While the project remains privately funded and facilitated, the notions of its network of security is a critical point of interest (Der Spiegel 2014; Doerr 2015:83).

Multinational firms have the ability to negatively impact a host nation after negotiations regarding foreign investment have been signed and ratified. Nicaraguan Canal agreements, written exclusively in English, are prone to wide interpretations, creating legal loopholes in which the HKND Group can operate. These legal blind spots could prove devastating and financially burdensome for the government of Nicaragua. For example, Nicaraguan Canal Law 840 states that the HKND Group is “not responsible for pre-existing environmental conditions” affecting the proposed canal route (Huete-Pérez et al. 2015:3995). The lack of a proper definition and degree to which “pre-existing” conditions are considered in the financial and legal favor of the HKND Group, possibly permitting canal security personnel to guard and use force in light of problematic circumstances that occur along the areas under construction potentially with local populace. This will also grant substantial authority to any security forces hired to patrol the canal due to their ability to exercise control over the geostrategic investment project.

Another legal loophole yet to be publically addressed by either entity concerns national Nicaraguan legislation that prohibits the sale, lease or seizure of communal indigenous lands. The Nicaraguan-HKND Group canal contract specifically grants HKND the right to expropriate any land “considered necessary for canal projects…” as well as the “exclusive access to natural resources along the canal route (Meyer and Huete-Pérez 2014).”

The methods in which HKND selects and implements the expropriation of land necessary for canal construction and the specific definition of “access” pertaining to natural resources are not-surprisingly ambiguous.

This raises questions on the role of the Nicaraguan police, military or the utility of the HKND private security personnel deployed to protect the site. In addition, the potential for human rights violations that could arise from the expropriation of natural resources from indigenous communities in Nicaragua directly violates the UN Declaration on the Rights of Indigenous People and will arguably increase confrontations between private security and civilians along the canal route.


The magnitude of Chinese securitization of raw materials and political influence through its investment endeavors around the globe is of particular importance to civil society, and members of the international community as a whole. The construction of the Nicaraguan Canal by the HKND Group can be considered an ambitious private venture to provide economic and strategic advantages to developing economies in Latin America. Alternatively, considering the degree to which the Chinese government is as an active stakeholder in its private sector, the investment venture can be understood as a broader strategic move to enhance geopolitical relations with China in the region. The Nicaraguan Canal is one project that harmonizes with Chinese economic expansion policy, seemingly supported to create an avenue for direct influence by the Chinese government in terms of economic viability and security. The opaque nature of the provision of security over such infrastructure projects embodies a broader phenomenon in which effective governance of the private sector is unmanageable. While this accusation cannot be definitively realized or quantified, there is overwhelming evidence supporting the strategic capacity of the Chinese government as a major clandestine actor through private investment ventures.

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