Israel still has work to do to ensure its security when it comes to Chinese involvement in sensitive technologies and major infrastructure projects, former ambassador David Friedman warned this week.
“I think this will be an ongoing, dynamic issue between the US and Israel,” Friedman said in his final days as ambassador. “I think Israelis understand the threat China presents to the world.”
Friedman added that “guardrails have to be strengthened in terms of Chinese malign investment,” but that Israel is “in a better place” than it was in when the US began working with Israel on the issue.
“I think it will evolve to a better and better place as we get more sophisticated,” he said. “It’s an evolutionary process; it’s dynamic.”
Friedman pointed to the Abraham Accords, in which Israel normalized relations with four Arab states, as a possible new avenue for investments in Israel.
“I think the opening up of relations in the Gulf makes the situation better,” the departing ambassador said, referring to the United Arab Emirates and Bahrain. “I think we’ve identified a less malign source of capital than China for Israeli entrepreneurs.”
The full interview with Friedman, in which he discusses his term as ambassador and the Trump administration’s Israel policies, will appear in Friday’s edition of The Jerusalem Post.
In recent years, the US has warned against Chinese involvement in vital infrastructure and fields of technology with a risk of data breaches. The concern is over the ability of Chinese operatives to gather intelligence in Israel, as well as massive economic, social and environmental losses, and even casualties, that could be inflicted by damaging infrastructure.
Companies involved in constructing the Tel Aviv light rail – CRRC and CRCC – are on a US Department of Defense blacklist of companies that have strong ties to the Chinese military. Those companies also have ties with Iran, building railways and supplying the Islamic Republic with subway cars.
America has specifically encouraged Israel to establish a more robust system of weighing the risks of foreign infrastructure investments, similar to the Committee on Foreign Investments in the US.
Israel has a committee on foreign investments, established in 2019, but it is voluntary (regulators are not required to bring investments before it), its recommendations are nonbinding, it does not have the power to cancel deals, and it relates only to investments that require government approval. The committee’s meetings and membership are not transparent. In addition, it gives advice only on investments in finance, communications, infrastructure and energy, but not the tech sector, where most Chinese investments in Israel go.
Last year, amid major pressures from the US, Israel selected a local company, IDE Technologies, rather than Chinese firm Hutchison, to construct Sorek 2, the world’s largest desalination plant.
New research from Institute for National Security Studies research fellow Doron Ella, published this week, found that Chinese investments in Israel have been declining since 2018. He says “the data on Chinese investments in Israel show a better situation in the level and trends of Chinese involvement in the Israeli economy, and the hi-tech sector in particular.”
The decrease in investments in Israel was in parallel to worldwide trends, due to changes in the Chinese Communist Party’s policies – and, in the past year, the COVID-19 pandemic.
Ella also posited that “China chilled its investment momentum in Israel out of an understanding that [Israel] is prone to increasing American pressure to examine Chinese investments more critically, and in light of the establishment of a government system to oversee foreign investments.”
Chinese investments are less than 10% of all foreign funding in the Israeli market, and most goes into hi-tech. Those investments tend to come from private companies and venture capital funds. But investments outside the tech sector tend to be in infrastructure and from government-owned companies, Ella explained.
The research paper points out that the main concern over Chinese investment comes from its access to, and influence on, sensitive technologies, such as in cases when venture capital funds become active partners in the start-ups in which they invest.
The US has a broader view than Israel in areas that are critical to national security, including Internet technologies, semiconductors, chips, life sciences – especially med-tech – software and communications. Those technologies have the potential to contribute to China’s future development, including to its military, and strengthen it in competition with the US. And those are areas that are not included in the Israeli investment oversight committee, creating an easy path for Chinese investment in them.
Ella wrote that the US is concerned that Chinese investments in Israeli infrastructure will give it strategic access and create Israeli dependence on Chinese construction companies in areas that are sensitive in terms of security.
The INSS paper offers advice on how Israel can “maneuver well in a complicated arena between its strategic ally and its important trade partner.”
This includes examining foreign investments more deeply than it has thus far, to ensure that China and other foreign governments “do not purchase control over strategically important Israeli infrastructure, particularly in the areas of electricity and water.”
In addition, Ella said, Israel should expand the areas the investment committee examines to include sensitive hi-tech categories.
“Strengthening Israel’s official supervisory mechanism will contribute to building trust with the Americans,” Ella stated.