China-Israel Bilateral Trade and Investment Outlook

China and Israel have shown progress in their ongoing negotiations toward a free trade agreement. As per reports from the Ministry of Foreign Affairs of the People’s Republic of China, the round of talks held at the end of March led to expectations for a signed trade deal in the near future. It was also planned that Israeli Prime Minister Benjamin Netanyahu meet with China’s President Xi Jinping at the end of the year, marking their first encounter in six years. However, it remains to be seen how the rest of 2023 will proceed in light of recent events.

China-Israel diplomatic relations

Before the establishment of official diplomatic relations, China and Israel had already set up their respective representative offices in Beijing and Tel Aviv 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. Similarly, in 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, China and Israel have been progressively improving their relations, which reached their peak 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.

As per an official statement, Chinese President 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 China and Israel, and their renewed commitment considering the 30th anniversary of the establishment of diplomatic ties between the two countries. On this occasion, they also extended invitations to meet in person.

Recent developments in Israel-China bilateral relations highlight an active engagement between the two nations amid evolving global dynamics. Notably, President Xi Jinping expressed anticipation for an upcoming meeting with Prime Minister Benjamin Netanyahu in Beijing later this year (2023), as conveyed by Chinese Ambassador Cai Run in his exchange with Netanyahu, during which he emphasized the amicable nature of the diplomatic exchanges between the two countries.

Both nations have demonstrated a commitment to fostering stronger economic and strategic ties.

Foreign investment in Israel

Between 1995 and 2022, foreign direct investment (FDI) in Israel totaled US$14.28 billion on average, reaching a peak of US$112 billion in the third quarter of 2021.

Israel boasts of a creative, educated, competent, and diversified workforce, as well as an entrepreneurial spirit. It is a pioneer in innovation across many industries, and many Israeli start-ups find successful partners with foreign corporations. Sometimes referred to as the ‘Start-Up Nation,’ the country makes significant investments in both science and education. After China and the United States, Israel has the third-highest number of firms listed on the NASDAQ Stock Market. Several Israeli government organizations, including the Israel Innovation Authority, are often responsible for the funding of incubators for early-stage technological start-ups.

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.

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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.

China-Israel bilateral trade

Over the past two decades, trade of goods and services between China and Israel has increased significantly. China presently stands as Israel’s second-largest trading partner, with the total trade value reaching US$24.45 billion, marking an 11.6 percent increase in 2022 compared to the previous year.

In particular, between 2019 and 2022, trade between the two countries underwent a significant upsurge, marking an increase of US$6.41 billion, which accounted for a 57 percent growth.

Notably, this substantial rise primarily stemmed from imports from China, which escalated from US$6.79 billion in 2019 to US$13.12 billion in 2022, signifying a substantial US$6.33 billion increase.

Israel did, however, experience a trade imbalance with China as Chinese exports to Israel are around two times of Israeli exports to China. The growth of Israel’s exports to China is relatively marginal, with figures climbing from US$4.42 billion in 2019 to US$4.68 billion in 2022, contributing a modest US$0.08 billion to the overall growth.

Key traded items

Israel’s export of good and services to China in 2022 reached US$4.68 billion. Electrical and electronic equipment (US$1.78 billion), optical, photo, technical apparatus (US$1.29 billion), fertilizers (US$407.87 million), and machinery, nuclear reactors, and boilers (US$266.86 million) were Israel’s biggest exports to China.

On the other hand, China exported US$16.48 billion worth of goods and services to Israel in 2022, with the top categories being electrical equipment (US$2.63 billion), machinery, nuclear reactors, and boilers (US$1.78 billion), and vehicles (US$1.64 billion).

The import of Chinese vehicles, in particular, has played a pivotal role in expanding this economic relationship. Recent statistics reveal that Chinese-produced vehicles captured a substantial market share, accounting for 17 percent of vehicle sales in Israel during the first quarter of 2023, a notable 450 percent rise from the corresponding period in 2022.

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 (2020-2024 outlook) has identified Israel as having the second-lowest investment risk in the Arab region, 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.

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.

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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.

Future prospects for China-Israel relations

In 2021, China officially surpassed the United States to become Israel’s greatest 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 2023, a free trade agreement (FTA) – which was under discussion for several years – could be concluded by the two parties. It’s important to note, however, that the subsequent ratification process following the signing might extend for more than a year.

According to information from the Chinese Ministry of Foreign Affairs, the most recent dialogue between the two parties, held in March 2023, indicated significant strides in their reciprocal collaboration. Notably, this marked the eighth round of negotiations since 2016 and the first in-person meeting since November 2019.

The robust discussions surrounding the potential FTA between China and Israel have sparked particular interest among Israeli vehicle importers. With the significant share of Chinese vehicle exports dominating the Israeli market, the proposed elimination of the current 7 percent import duty on vehicles from China carries the potential to reshape market dynamics and reinforce the already thriving economic relationship between the two nations. Notably, these discussions encompass crucial areas such as e-commerce, copyright, and dispute resolution, indicating the comprehensive scope of the envisioned FTA.

Stakeholders from both nations are closely monitoring the progression of these talks, recognizing the potential transformative impact this agreement could have on trade dynamics and regulatory frameworks. As the negotiations enter their critical phases, both China and Israel are poised to make substantial strides in bolstering their economic collaboration, solidifying their position as key strategic partners in the global market landscape.

From a diplomatic point of view, amid its notable efforts in mediating the restoration of relations between Saudi Arabia and Iran, China has taken a firm stance to emerge as a prominent diplomatic influencer in the Middle East. This strategic direction is consistent with China’s overarching ambition to position itself as a global leader actively engaged in resolving complex international conflicts.

Notably, China’s growing involvement in the region extends to its diplomatic relations with Israel, as evidenced by the upcoming meeting between Prime Minister Benjamin Netanyahu and President Xi Jinping. This proactive engagement underscores China’s role as a potential mediator in the region, highlighting its concerted efforts to foster dialogue and cooperation between nations with diverse geopolitical interests.

This can be also seen in the neutral approach adopted by the country in the wake of the flare-up of the Israel-Hamas conflict in southern Israel and Gaza that began on October 7, 2023. Responding to the circumstances, a Chinese Foreign Ministry Spokesperson in a statement called on “relevant parties to remain calm, exercise restraint and immediately end the hostilities to protect civilians and avoid further deterioration of the situation”, and reiterated China’s support for a two-state solution.

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