China-Israel economic renaissance: A tale of two realities

Published: MARCH 30, 2017 21:24

Prime Minister Benjamin Netanyahu and his wife Sara visit the Great Wall during state visit to China, March 22, 2017 (photo credit: HAIM ZACH/GPO) — Prime Minister Benjamin Netanyahu and his wife Sara visit the Great Wall during state visit to China, March 22, 2017

(photo credit: HAIM ZACH/GPO)

Israel needs to adopt the necessary internal reforms and better understand China’s internal constrains and future directions.

Prime Minister Benjamin Netanyahu’s mission to China, completed last week, has been portrayed as a huge success story. But there is more than meets the eye.

Several important bilateral agreements were signed. To respond to Israel’s construction crisis, the parties signed and agreed that 6,000 construction workers from China would come and work in Israel in the next six months. Three joint artificial intelligence centers will be built in Israel and China, with initial investment of $10 million and led by leading academic, research and private-sector institutions. The two countries also signed a technology innovation agreement to collaborate in the areas of renewable energy, telecommunications, agriculture and biomedicine.

These new agreements, and many more to come, reflect the immediate needs of both sides.

China is facing a serious energy crisis, lacking the resources to support its continuous growth and dealing with high levels of pollution all around the country. Also, it is moving away from fast economic growth driven by mass manufacturing to local consumption and climbing the production-value chain through innovation and partnerships.

Israel, looking to take advantage of new Asian markets, has the resources and skills to respond to many of these needs.

Yet to fully embrace the Israel-China economic partnership, one should be aware of the short- and long-term challenges on both sides.

China will go through a political transition in the fall, and its leadership will do all it can to prevent a political and economic crisis. Unsustainable public and private debt, as well as limited investment opportunities in China, have led to restrictions on capital flows, which will continue to impact the country’s foreign investment policies. UBS, a global investment bank, estimates that China’s debt-to-GDP ratio could exceed 300% within two years, which is much higher than the 254% estimate in 2015.

Chinese companies will not be able to invest in the Israeli market and acquire Israeli companies with the same intensity in the near future. We already see a decline in Chinese merger activity in the American market for similar reasons.

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In addition, while most of the technologies subject to the China- Israel bilateral agreements do not touch sensitive areas and the Israeli government has repeatedly focused on the commercial, and not the strategic, nexus, Israeli companies have been successfully translating commercial innovation to military and security use over the years. Some of the joint projects will raise this concern in the future, especially in times when the United States and China are heading toward a potential trade war.

Most importantly, many of the proposed Chinese takeovers of Israeli companies have been rejected, suspended or delayed due to an inconsistent Israeli policy on Chinese ownership of Israeli industries. The Finance Ministry has rejected several Chinese bids to buy insurance companies. Since most insurance companies in Israel are now for sale due to recent regulatory reforms, and very few American companies have been interested in the assets, several potential Chinese buyers have tried to purchase them. Israeli insurance regulators find many of the Chinese potential buyers to have significant financial and reputational risks.

While the Israeli government allowed ChemChina to acquire Makhteshim Agan, several other transactions in the industrial space have followed the insurance market and posed challenges to Chinese takeovers of Israeli companies.

From the Chinese perspective, business leaders cannot see the difference between pro-China policies that encourage innovative Israel-China joint investments and direct Chinese investments in operational companies. Israel should adopt a more consistent approach to foreign investment, including Chinese foreign direct investment, including clear definitions of strategic industries and national security, and a proper cohesive mechanism to review potential transactions in a consistent way.

Transparency and data management are also a challenge for the future of Israel-China economic relations. In order for Israeli companies to make informed decisions, there is a need to provide accurate data on macro and industry factors.

According to several leading China analysts, such as Leland Miller of China Beige Book, China’s official economic numbers for both GDP growth and industry performance are inaccurate; thus, it is hard for Israeli companies to assess the risks and opportunities of many market segments. The Israeli government itself has been struggling in its efforts to provide accurate numbers on foreign trade with China and Chinese foreign investments in Israel.

Finally, from the Asia Infrastructure Bank to a rising involvement in Middle Eastern politics, China has started to translate its economic power to diplomatic influence. US President Donald Trump’s “America first” approach created a vacuum that China is tapping into, and Chinese leadership expressed its view during Netanyahu’s visit that Israel should pursue a peace initiative more assertively.

As of now, Beijing’s relationship with Israel has focused on innovation and commercial opportunities, yet the day may come when China will divert toward more political and military directions.

The new fairy tale is exciting. But Israel needs to adopt the necessary internal reforms and better understand China’s internal constrains and future directions in order to make sure that an Israel-China economic renaissance is on the right productive path.

The writer is an international economic law and business professor, media commentator and adviser working with governments and corporations on trade, investment, national security and energy projects and policies. @Chalamish