China and the Middle East: Blurring the Lines

Introduction

China is a keen consumer of technological innovation, and Israel, the “quintessential start-up nation”[1] with a burgeoning entrepreneurial technology industry, is a willing vendor. The Sino-Israeli technology trade relationship combines state-led diplomacy with ostensibly non-state corporate investment, and it is flourishing. This has immense political, economic, and security implications for the Middle East and North Africa region and the wider world.

Israel: Only the First Step?

As part of ‘Made in China 2025’ strategy to pull its hi-tech industry up onto to the same level as its Western counterparts, China is keen to increase its technological capabilities, particularly in artificial intelligence, robotics, cyber, telecommunications and smart manufacturing[2]. However, in the US and Europe, Chinese investment in technology is being met by high levels of scrutiny and at times, active discouragement. The US blocked e-commerce conglomerate Alibaba’s bid for US money transfer company MoneyGram citing national security issues in 2018[3], while the bid for the German mapping company HERE by internet giant Tencent was dropped following US-led resistance in 2017[4]. The recent friction regarding the technology conglomerate Huawei, including the arrest of its CFO Meng Wangzhou in early December[5], is yet another symptom of the same problem.

By contrast, Israel is open for business. With no sizeable domestic market, Israel’s extensive technology industry is reliant on foreign markets for scale. Chinese companies are therefore viewed not as competitors but as “critical partners”[6]. Israel already has substantial relationships with American companies such as Microsoft, Google, and Intel[7] and it is also keenly aware of the further opportunities Chinese investment will bring to its technology industry and wider economy. For China, Israel is immensely attractive not only because it is an open trading partner, but also because it occupies a strategic position on China’s ‘One Belt, One Road’ initiative[8]. To coin an oft-used Chinese phrase in foreign policy, this economic relationship is “win-win” for both nations. The numbers speak for themselves: in 2016, Chinese outbound investment in global technology was US$37.8 billion[9]. Its investment in Israel alone, a large proportion of it directed at Israeli tech, was US$16.5 billion[10].

The true complexion of the Sino-Israeli relationship is, of course, diycult to discern. Diplomatic relations are friendly between the two nations, especially regarding technology. In 2015, Chinese President Xi Jinping and Israeli Prime Minister Binyamin Netanyahu signed an agreement to boost co-operation in technology[11]. Most recently in October 2018, Binyamin Netanyahu co-hosted the launch of the Israeli Innovation Summit with Wang Qishan, the Chinese Vice-President. Another high-profile attendee was Jack Ma, the founder and executive chairman of Alibaba[12]. The Israeli Innovation Summit serves to highlight the diplomatic commitment between the two nations regarding technological innovation and trade and shows that they are closely collaborating with leading corporate figures from the industry.

Indeed, there is reason to believe that Chinese state-led diplomatic exorts are working in conjunction with private corporations. In an interview with the South China Morning Post, Michael Ruan, the chief representative of the Shanghai-based start-up accelerator and venture capital firm Sino Israel Technology Innovations, said that about a third of his US$50 million funding came from Chinese authorities[13]. In 2017, Sino Israel Technology Innovations invested US$3 million into three early-stage Israeli smart-device makers[14]. Even companies who do not receive monetary backing from the Chinese government, such as Peakview Capital directed by Cao Xueling, want to “ensure our targeted regions are in line with Beijing’s preference”[15].

In 2017, in line with a global 30% drop in Chinese investment following stricter regulations in the country over outbound investment[16], Chinese investment in Israel retrenched slightly. In March 2018, however, the Chinese State Council revised the regulations and Chinese investment in Israel began to rise again. In the context of ‘Made in China 2025’ and Israel’s strategic position on ‘One Belt, One Road’, the decision to give Chinese private investment in Israel the go-ahead seems to have been made because it was considered economically and politically advantageous. This also points towards co-operation between state and non-state actors in Chinese foreign policy. The Sino-Israeli technology trade relationship can therefore be considered an example of China’s use of state-led diplomacy in conjunction with (ostensibly) non-state ayliated firms that serve as vehicles for their broader political and economic strategy.

Chinese involvement in the Israeli technology industry has immense implications, particularly regarding security. The US and Israel collaborate closely on the development of military technology, and there is therefore real concern, voiced by Lee Branstetter, who is a professor of economics and public policy at Carnegie Mellon University, that “Israel could become a back door through which China could acquire capabilities that it could not get in the US due to regulatory scrutiny”[17]. The Israeli government is also concerned with Chinese industrial espionage and is therefore currently in the process of passing legislation to vet foreign investment. This may adversely axect the Sino-Israeli trade relationship. Notably, however, the Zionist Union lawmaker Omer Bar-Lev, who proposed the legislation was recorded as saying, “The proposal isn’t aimed just at restricting investments by Chinese bodies. If a Russian company wants to buy a cybersecurity company of a major tech company like Check Software, it will need to be vetted. So will investments by front companies registered in Luxembourg, let alone a private company that may have Arab parties behind it”[18]. Bar-Lev’s deflection of the focus on Chinese investment through a broader discussion of all foreign investment implies that the Israeli government do not wish to alienate and cause friction with China. It seems likely that Chinese investors and companies will still be welcome.

China’s use of state and non-state actors to facilitate their investment projects in Israel points to a larger strategy being implemented across the Middle East and North Africa. Accounting for 31.9% of direct foreign investment in MENA, China became the region’s largest foreign investor in 2016. The most recent addition to their economic projects is their initiation of free-trade talks with Palestine in late 2018[19]. The ends of China’s strategy are primarily economic. However, unintended or otherwise, their involvement is also giving them political clout. Uncharacteristically, but perhaps driven by their long-held belief that economic prosperity brings peace, the Chinese are getting more involved in political axairs in the region by leading a number of ‘Peace Symposiums’ on the Palestinian-Israel conflict and the Syrian Civil War[20].

Conclusion

In the world of Chinese foreign policy, state and non-state actors are intimately linked, and Chinese investment in the Israeli technology industry is but one example. China is making a concerted exort to involve itself in the economic axairs of the MENA region through a combination of state-led diplomacy and allegedly non-state ayliated corporate investment. The success of this strategy in Israel is likely to be replicated across the region with significant economic and political consequences.