Israel steps up scrutiny of Chinese investments under pressure from US as it seeks to balance ties

  • Jerusalem has promised to keep Washington ‘in the loop’ about its China dealings, after US security chiefs raised concerns about the pair’s relationship
  • Trade and investment have soared in recent years, but analysts said Israel continues to prioritise the US – even as its business sector leans more towards China

Israel looks set to strengthen a mechanism it set up to vet Chinese investments for security concerns, amid mounting pressure from key ally the United States.

Jerusalem established its foreign investment oversight committee in October 2019 at Washington’s behest, but the body is “virtually toothless”, according to regional news portal Al-Monitor, which said in an October report that a proposal was being considered to bring the committee under the umbrella of the national security council.

The government of Prime Minister Naftali Bennett, who took office in June, has been under sustained pressure from Washington to roll back the red-carpet welcome extended to Chinese investors in 2013 by his predecessor Benjamin Netanyahu.

Israeli Prime Minister Naftali Bennett’s administration has promised to keep Washington “in the loop” about any significant deals struck with Chinese firms.

 

The new administration has promised to keep Washington “in the loop” about any significant deals struck with Chinese firms, Israel’s respected Haaretz newspaper revealed in an unsourced report on January 3, as it also prepares to re-examine any agreements opposed by the US.

As an alternative to awarding infrastructure projects to Chinese state-owned enterprises, Haaretz said the Bennett administration had expressed interest in working with India, the United Arab Emirates – with whom Israel normalised relations in September 2020 – and other partners.

To further avoid inflaming tensions, Israel has been giving the US advance notice of high-level talks it holds with China – as it did ahead of a virtual meeting on Monday at which Israeli Foreign Minister Yair Lapid and Chinese Vice-President Wang Qishan agreed to a three-year plan for cooperation on the economy, science, R&D and technology, news website Axios reported.

Security concerns

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The issue of Chinese involvement in Israel’s economy and tech sector was first raised in August last year by Central Intelligence Agency director William Burns in a meeting with Bennett in Jerusalem.

US President Joe Biden reportedly pursued the matter when he met Bennett in Washington later that month, although it was not mentioned in the White House press statement on the meeting.

In October, a US State Department official briefing journalists ahead of a videoconference with Lapid said Secretary of State Antony Blinken would hold a “candid” conversation with the Israeli foreign minister “over risks to our shared national security interests that come with close cooperation with China”.

Israel’s Iron Dome anti-missile system intercepts a rocket launched from the Gaza Strip last year. A dispute over US funding for the system raised eyebrows in Jerusalem recently.

 

US National Security Adviser Jake Sullivan again pressed the matter when he met Lapid in Jerusalem in December, according to the Israeli press.

Israeli analyst Carice Witte told This Week In Asia that Jerusalem “should and does take very seriously” the US’ national security concerns about Israel’s relationship with China.

“As Israel’s closest ally – that provides a veto in the United Nations Security Council and stands against the tide of biased anti-Israel voting in the UN, as well as providing real material support for Israel’s defence – the US perspective certainly warrants special consideration,” said Witte, who is founder and executive director of the Sino-Israel Global Network and Academic Leadership think tank.

The US pressure campaign was punctured somewhat following a September feud in the House of Representatives over US$1 billion in additional funding for Israel’s Iron Dome missile defence system, which raised eyebrows in Jerusalem. The measure was ultimately passed after being stripped out of a broader spending bill, but the furore among Democrats made plain the extent of anger at Israel’s refusal under Netanyahu to negotiate with Palestinian representatives.

“Washington’s message on a possible block of the Iron Dome funding has not been lost in translation in Israel. Now Israel needs to fine-tune its priorities to the US over future deals with China,” said Alessandro Arduino, principal research fellow at the National University of Singapore’s Middle East Institute.

“China is not a newcomer in the Middle East and its relationship with Israel has been a balancing act since its inception.”

Arduino said the Bennett government needed Washington’s support “more than ever” in several critical areas, including by taking a harder line on Iranian nuclear deal negotiations.

To that end, the Bennett administration broke with Netanyahu’s policies by supporting a call in June by 40 countries at the UN for China to allow independent observers access to Xinjiang to assess the crackdown on the indigenous Uygur Muslim population.

Beijing issued a diplomatic statement of protest after Jerusalem informed it of its decision to back the move initiated by Canada.

Then in November, Xi Jinping and Isaac Herzog held the first-ever phone call between the sitting presidents of China and Israel, discussing Iran’s nuclear programme, bilateral ties and the Abraham Accords, under which Israel normalised ties with the UAE and Bahrain two years ago.

Weak impact

Increased oversight of foreign investments by Israel is unlikely to pose too many problems for China, according to analysts, as US corporations have little interest in competing with Chinese state-owned entities for Israeli infrastructure projects, the measures are being belatedly introduced, and Jerusalem is reluctant to upset its second-largest trading partner.

Trade between China and Israel has soared over the last 20 years. From US$1.07 billion in 2001, it reached US$11.6 billion in 2018, according to Israeli customs data.

Speaking to Xinhua news agency on January 23, China’s ambassador to Israel said bilateral trade had leapt to US$22.8 billion in 2021.

Washington is particularly concerned about Beijing gaining access to dual-use technologies from Israel, a world leader in R&D that is renowned for its technology start-ups.

However, Chinese investment in Israeli technology companies peaked in 2018 as Beijing began switching the focus of its economic policy to domestic investment – a move that was accelerated by the Covid-19 pandemic.

According to a paper published in February last year by Doron Ella, a research fellow at Tel Aviv University’s Institute of National Security Studies, Chinese firms made 463 investments and acquisitions of Israeli firms worth US$19.44 billion between 2001 and 2020 – 449 of which were in Israeli companies specialised in a diverse range of technologies.

Most deals struck since 2014 – after Netanyahu rolled out his China-friendly investment policy – have focused on communications, software development and IT, and life sciences such as medicine and biotechnology, the report found.

Information on 131 of these deals, worth US$9.14 billion, was made public but the other 318 remain shrouded in secrecy – fuelling US concerns about China gaining access to advanced technologies.

These concerns were spotlighted in February last year when Israel’s Shin Bet internal security agency announced it had arrested 20 Israelis for illegally selling cutting-edge drone technology to China for “tens of millions of dollars”.

Working through a complex network of intermediaries, Beijing was accused of acquiring technology for the Harop loitering suicide drone manufactured by Israel Aerospace Industries.

The Harop and other Israeli drones were widely credited by defence analysts as playing a decisive role in Azerbaijan’s victory in the 2020 Nagorno-Karabakh war with Armenia.

The episode echoed a 2005 crisis in relations between Washington and Jerusalem triggered by a deal to upgrade an undisclosed number of Harpy loitering drones sold to China between 1994 and 2003, which ultimately led to Israel enacting legislation banning military exports to China.

Bones of contention

Israel’s “military advancement has been on Beijing’s radar” since the two countries established informal ties in 1979, according to the NUS Middle East Institute’s Arduino. Their formal diplomatic relationship began in 1992.

“The recent rise of Turkish combat drones is acquiring an essential share of the market that once belonged to China,” he said. “As a result, Ankara is pressuring China to innovate its armed drones and Israel, considered a leading developer of loitering munitions and combat drones, fits the bill.”

But Witte, the analyst who specialises in Israel-China ties, said the pair’s relationship was unlikely to be as contentious as the military and technological collaboration undertaken by other US allies in the region, such as the UAE, which has pushed back against pressure from Washington.

“As long as the technology ties between Israel and China do not cross over into sensitive areas, the US will have little to say about Chinese state-owned enterprises, private businesses and venture capital funds contributing to the Israeli economy,” she said.

“At the end of the day, US corporations are not bidding on tenders such as the ports and desalination plants – they are simply not of interest to the few US companies in those fields.”

The Port of Haifa, the largest of Israel’s three major international seaports, is the site of a US$1.7 billion Chinese-built container terminal.

 

No Western companies bid for the 25-year contract to manage the US$1.7 billion Chinese-built container terminal in the Israeli port city of Haifa, for example – though Washington did try to block Chinese state-owned Shanghai International Port Group from winning the bid by arguing the facility could be used to spy on the US Navy’s Mediterranean fleet.

Chinese corporations are at the forefront of building Tel Aviv’s new urban rail network and other large-scale infrastructure projects in Israel, and have become deeply entrenched in the Israeli consumer market through majority acquisitions of iconic brands such as the Tnuva dairy company.

“Israel’s ongoing decision to prioritise deals with the US will be constantly probed by the Israeli business sector that leans towards China and the fast-evolving security architecture in the Middle East,” Arduino said.

US allies in the region are all “too well aware that China’s foreign policy is rooted towards an investment-centric approach while a commercial relationship with Beijing is not going to be backed by military support”, he said.

“Therefore the only available play is constantly fine-tuning the relationship with the US without jeopardising the one with China.”

Author: Tom Hussain, SCMP

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