Israel-China Bilateral Trade and Investment Outlook

Trade and investment cooperation between Israel and China has accelerated since 2000, especially in the technology and infrastructure sectors. While Tel Aviv has backed the Belt and Road Initiative (BRI), China recognizes Israel’s strategic location. As the two countries observe 30 years of diplomatic relations, they now hope to reach a Free Trade Agreement by the end of 2022.

Israel-China diplomatic relations

Before the establishment of official diplomatic relations, Israel and China had already set up their respective representative offices in Beijing and Tel Aviv respectively to serve as ‘de facto embassies’. The Israeli Office in Beijing, formally known as Liaison Office of the Israel Academy of Sciences and Humanities, was officially inaugurated in June 1990. The same year, the Chinese government opened the China International Travel Service branch in Tel Aviv.

Diplomatic relations between the two countries were officially established in January 1992. From then on, Israel and China have been progressively improving their relations, starting with the visit of President Jiang Zemin to Israel in 2000. Since then, four Israeli presidents and three prime ministers have made official visits to Beijing, including most recently Prime Minister Benjamin Netanyahu in March 2017.

According to an official statement, Xi Jinping and his Israeli counterpart, Isaac Herzog, had their first-ever official contact through a phone call in November 2021. The two leaders exchanged their views about ways to strengthen bilateral relations between Israel and China, and their renewed commitment considering the upcoming 30th anniversary of the establishment of diplomatic ties between the two countries. On this occasion, they also extended invitations to meet in person.

Foreign investment

Chinese FDI in Israel

As of 2022, only a small percentage of China’s overall foreign investment is directed to Israel, and the country’s growth rate is also lower than China’s overall growth rate for foreign investment. China has boosted its average yearly investment in Israel from 2002, with the annual investment growing from US$20 million to more than US$200 million.

Data from the Institute of National Security Studies shows that China’s investments and M&As in Israel were overwhelmingly directed to the technology sector (449 deals with a reported value of roughly US$9.14 billion up to 2019).

Besides the technology sector, eight deals were closed in the infrastructure sector at a total value of US$5.91 billion, including four deals in the transportation sector, two in the ports sector, and two in the electricity sector, all signed by Chinese state-owned enterprises (SOEs). One deal was closed in agriculture and real estate (the acquisition of Tnuva), one in the minerals sector (the acquisition of Adama), two deals involved investments in academic institutions (the Technion and Tel Aviv University), and another one was related to the advertising industry (the acquisition of Bagir).

The two high-tech sectors where the Chinese invested the most were software development and IT (US$1.12 billion) and health sciences (US$1.35 billion). This happens as China continues to invest in the life sciences industry, among other science and technology sectors, to acquire the advanced knowledge and capabilities required to help the country address challenges related to medicine and pharmaceuticals.

It is also not surprising that China is increasing its investment in Israel’s chip and semiconductor industries, as well as software development and IT. One notable example is the investment of Chinese e-commerce giant Alibaba into the funds of Jerusalem Venture Partners (JVP), operating in the field of cybersecurity.

Israel-China bilateral trade

Over the past two decades, trade of goods and services between China and Israel has increased significantly. The Israeli Central Bureau of Statistics (CBS) reports that the value of trade between Israel and China increased from US$1.07 billion in 2001 to US$17.54 billion in 2020.

China has become Israel’s third-largest trading partner, but it remained far behind the European Union (US$40 billion in 2020) and the United States (US$18 billion in 2020), even though Israel trades with China more than it does with any other individual European country.

Israel did, however, experience a trade imbalance with China as Chinese exports to Israel are around two-times the Israeli exports to China. Israel’s exports to China peaked in 2018 at US$4.77 billion, but since then, the figure has fallen slightly. In 2020, Israel exported US$4.22 billion worth of goods to China. On the other hand, Israel’s imports from China continue to rise rapidly and hit a record high of US$7.66 billion in the same year.

Key traded items

Israel’s export of good and services to China in 2020 reached US$6.29 billion. Integrated circuits (US$2.13 billion), other measuring instruments (US$416 million), and x-ray equipment (US$218 million) were Israel’s biggest exports to China.

On the other hand, China exported US$11.25 billion worth of goods and services to Israel in 2020, with the top categories being clothing articles (US$250 million), broadcasting equipment (US$224 million), and nitrogen heterocyclic compounds (US$213 million).

Chinese exports to Israel have grown at an average rate of 16.6 percent over the past 25 years, from US$192 million in 1995 to US$11.25 billion in 2020.

Israel’s participation in China’s Belt and Road Initiative

In 2017, China and Israel announced they would usher in a new phase of their relationship. China-Israel ties have witnessed collaboration in several areas, from the Belt and Road Initiative (BRI) to technology and innovation exchanges.

The Economist Intelligence Unit’s BRI risk assessment report has identified Israel as having the second-lowest investment risk, making the market extremely alluring to China, which is presently seeking a more strategic regional presence.

A growing geoeconomic alliance with Cyprus, Egypt, and Greece, massive energy resource developments in the Eastern Mediterranean, new ports opening up, and trade routes being set up with its Arab neighbors, make Israel a highly attractive BRI market for China.

Israel investment in Chinese tech

The Israeli Ministry of Economy (MOE), along with China’s Ministry of Science and Technology (MOST) and the People’s Government of China’s Jiangsu Province co-signed an agreement in 2014 to promote the long-term business partnership between Israeli and Chinese companies and, in particular, to support the first in boosting national innovation. The agreement encouraged Israeli businesses to join in the China-Israel Changzhou Innovation Park with incentives especially available to Israeli companies. The Park is located in Changzhou – one hour away from Shanghai and Jiangsu’s capital city of Nanjing – and provides a safe space with lower barriers for Israeli companies to enter the Chinese market in advanced industries.

Chinese investments in Israeli infrastructure

According to data from the Israeli Ministry of Transport and Road Safety, the country is currently spending about US$5 billion annually to upgrade its transportation infrastructure, including the construction of airports, seaports, railroad tracks, roads, and tunnels. Taking advantage of these opportunities, in recent years, Chinese firms have taken on significant infrastructure and transportation projects in Israel, including gaining the contracts to construct new ports in the southern Israeli cities of Ashdod and Haifa as well as a crucial portion of the Tel Aviv light rail system.

The brand-new port in the bay of Haifa, a city in northern Israel that serves as the nation’s industrial and transportation hub, has revealed to be a success for the trade of tons of products daily. Since its inauguration in September 2021, the port has already lowered import prices and boosted the economy of Israel – given that shipping is the primary mode of transport for the country’s foreign commerce.

The Shanghai International Port (Group), which was granted a 25-year franchise to operate the port, built it as an automated container port. The site can handle 1.86 million 20-foot equivalent units annually at an expenditure of US$1.7 billion.

Prospects for Israel-China relations

In 2021, China officially surpassed the United States to become Israel’s biggest source of imports. In an effort to diversify its foreign reserves, Israel added the Chinese yuan to its central bank reserves for the first time in April 2022, while reducing its holdings of the US dollar and the euro. Finally, by the end of 2022, a free trade agreement (FTA) – which was under discussion for several years – is likely to be concluded by the two parties.

As Israel and China mark 30 years of diplomatic relations, it is evident that their bilateral economic and business ties are deepening. While the cooperation between the two countries seems destined to flourish in key sectors, some challenges remain in the form of geopolitical pressures.

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