How is this for a love story? She was beautiful, of course, but most importantly, very brainy. He was a self-made trillionaire many times over, determined, strong and powerful. But to really make his name in the world he needed her. They were a match made in heaven. Together they did beautiful things.
That is more or less how we’ve been sold the budding romance between Israel (the brainy one) and China (the moneybags).
China is a rising global economic power that now makes the world’s iPhones and eggbeaters, but it has aspirations to move up the value chain and start making its own products with its own technology instead of being America’s and Europe’s subcontractor. Along comes Israel, an acknowledged technology power but far too small to compete with China in large-scale manufacturing.
The two will get together, with Israel supplying the innovation and China the manufacturing and markets.
Budding romance turns bloody
The love story isn’t entirely a fantasy, but like any deep relationship, there are a lot of motivations.
China really does love Israel for her technology, but she was also a good place to deposit money in case things went awry at home a slowing economy or political instability. Often when Mr. China makes love to Israel, it's these things he has in mind.
Israel is starting to learn that the romance isn’t everything it was cracked up to be. The torrid affair isn’t by any means over, but it’s entering a more complicated stage.
That surfaced in the last couple of weeks when three Israeli publicly traded biotech companies learned that Chinese groups that had agreed in principle to make an investment backed down.
The stories have much in common. All three Pluristem, BioLine and Insuline are in high-tech, and even though they're publicly traded, they're in effect startups and need capital to fund their research and development.
In all three cases, Chinese investors came offering to invest in the companies at a considerable premium to their market valuations. This month, the Chinese investors suddenly had a change of heart.
Real value, or conduit?
There's no reason to doubt that the Chinese investors were interested in the technology, but there's good reason to suspect that the excessive valuations were a way of exporting capital out of the country.
In Insuline’s case, the unnamed Chinese investor was ready to do the deal at a $10 million valuation, more than seven times the company’s $1.5 million market value when the offer was made.
That's what a lot of Chinese have been doing. Since the yuan was devalued in August 2015, some $1.2 trillion has poured out of the country, causing the yuan to fall in value and foreign-currency reserves to shrink. A lot of that capital outflow has gone into overseas real estate and inflated export contracts. It’s fair to assume that some also went into speculative tech ventures in Israel.
The Chinese government is cracking down, slapping on more and more restrictions on how companies can invest abroad and creating new hurdles for private individuals trying to send money out of the country. A new package of rules was introduced on Thursday.
That doesn’t mean the Israel-China romance is over – on Thursday TheMarker reported that a Chinese company had agreed to buy Servotronix, a maker of motion-control technology. But it does mean the era of easy money is coming to an end for the foreseeable future.
Since Chinese don’t buy Israeli real estate, the main victim is going to be the high-tech sector, which raised a record level of capital last year, part of which has to do with Chinese investment.
A little China First
Unlike everything else happening these days, none of this has to do with Donald Trump. But it does give a hint to what the world is going to be like in the Trump era. When the president of the world’s most powerful country says America will now be first and acts quickly to pull out of the Trans-Pacific Partnership and build walls to keep out Mexican immigrants, it signals a major disruption in the world order. Other countries will have no choice but to rethink their economic policies.
It predates Trump’s taking office, but Beijing is engaging right now in a little China First, and we in Israel can see what that means.
How exactly America First will play out is anyone’s guess, and I suspect Trump himself hasn’t any idea beyond Twitter feeds. But it almost certainly portends an era of less free trade and cross-border investment, which is the lifeblood of Israel and Startup Nation. Our love affair with China may not survive.
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