Why China Is on a Shopping Binge in Israel

Israel isn’t known as Insurance Nation, yet Chinese buyers seems oddly fascinated with getting a piece of the action.

Reuters

“Chinese firm to buy Israeli ” has become the business news equivalent of the proverbial “dog bites man”  headline: the story doesn’t count as news because it happens all the time.

This week alone Fujian Yango Group offered to pay $515 million for control of the Phoenix insurance company. Beijing Xinwei Technology Group agreed to pay $285 million for Spacecom, which operates the Amos satellites.

Three weeks ago China Communications Construction Company was one of three companies offering to buy the desalination-engineering company IDE Technologies for $650 million. Before that, TheMarker reported that IronSource, Israel’s biggest internet company, was in talks to be acquired by an unnamed Chinese company, and days earlier a Chinese consortium paid $4.4 billion for the online-gaming firm Playtika.

We flatter ourselves that Chinese companies are here in Israel to buy a piece of Startup Nation and use Israeli brain power to help Chinese companies move up the value chain and make smarter products. A lot of the deals, especially investments in startups, are just that.

But you have to start asking some serious questions when Chinese companies have Israeli insurance companies in the sights.

When the news hurts

Fujian Yango’s interest in Phoenix marks the sixth time that a Chinese company has bid for one of the two Israeli insurers now on the block -- Phoenix and Clal. Israel isn’t known as "Insurance Nation," yet Chinese buyers seems strangely fascinated with getting a piece of the action.

“Dog bites man” may not have the same news value as “man bites dog,” but for the man it’s painful whether or not the incident is headline-worthy. Israel should be looking at this wave of Chinese interest warily.

Daniel Bar-On

(When Bright Food offered to buy the dairy maker Tnuva, a chorus of worriers wailed that the sale would endanger Israeli health, given China’s record of tainted-food scandals. In fact, the real problem with contaminated food turned out to be right here at home, as the recent salmonella scare has shown. Tnuva is one of the few major companies to have stayed clean.)

With the Phoenix deal, the worry isn't bacteria, it's that a Chinese company will have control over tens of billions of shekels of Israeli pension savings that it could invest in dubious ways back in China. That concern deserves some examination.

But the real problem is not what Chinese companies will do with their Israeli assets. It's why they should want them to begin with.

To answer that, we have to look at China itself, where there’s been a surge of outbound foreign investment.

In the first half of this year, Chinese companies  bought 493 foreign companies worth a combined $134.3 billion, a 350% increase over a year earlier, according to PwC. Meanwhile, wealthy Chinese have been pouring money into foreign assets, mainly real estate.

The general consensus is that it is all for the good. Chinese companies are making “strategic” investments that will help them penetrate overseas markets and acquire technology and management skills. The government is even encouraging this under its “going out” policy of turning Chinese into a global economic power.

Speaking of insurance

But there is the other side to this story. It seems a lot of Chinese are less than confident about their economy’s future and would like to put some money overseas as an insurance policy. It could be an apartment in Sydney or Vancouver. Or, it could be by more nefarious means, such as paying for overpriced imports from a tax shelter like the Bahamas.

Another way of exporting your money is buying a company that’s in reasonable enough shape and in a country safe enough that your investment won’t evaporate. And just to make sure you win the bidding, you offer more for it than anyone else.

Israel is an excellent destination. The economy is in good shape, there’s less resistance to Chinese buying assets than in the U.S. and Europe, and with the deadline set by the Business Concentration Law for Israeli holding companies to sell assets, there is a lot of good merchandise on the M&A market.

These days, Chinese companies are equally enamored of Israeli innovation as they are of the country as an attractive parking garage for their assets. It won’t go on for much longer. Beijing is aware of the capital flight problem and is starting to crack down and China’s economy is slowing. We would do well not to get used to all that Chinese money.