A stock market meltdown in world financial centers is a doomsday scenario, not just for the stockholders who lose money in the market but for Israel as well, which is dependent on outside sources of investment to keep its high-tech pump primed. And with the growing investment relationship between Israel and China, Israeli tech firms have good reason to be concerned that Chinese investors, taking losses at home, will hold back on foreign investments abroad, including in Israel.
That may indeed happen, say investors in both Israel and China, but if there is a falloff in Chinese investment money, it is likely to be temporary.
“Chinese firms still need to innovate in order to compete,” said Benjamin Peng, Business Director of Shanghai-based Yafo Capital, which runs a venture capital fund dedicated to investing in Israeli start-ups. “They need the core tech Israel supplies. While some investors may think twice as they consider the impact of the market fall on their own situation, short-term stock market fluctuations will not prevent them in investing in good technology.”
According to many economists, the rout in Chinese stocks that has been going on for the past month – since the beginning of June the Shanghai stock market has lost about a quarter of its value – was a long time coming. Edouard Cukierman, chairman of Cukierman & Co. Investment House and a managing partner of the Catalyst Investment Funds, a large joint Israel-China investment fund, which has secured over $100 million for investments in Israeli firms that work with China, said that it’s perhaps what’s surprising is that it took so long for the shakeout to take place.
“The manipulation of the Chinese stock market is well known, with the prices for shares driven up far out of proportion to company’s actual worth by speculators. Many people were expecting an adjustment, and that adjustment has arrived.”
“Speculative bubble” is usually the term applied, often in retrospect, to what economists call the unrealistically high valuations in Chinese stocks (valuations of an average 220 times reported profits are common, far more than the NASDAQ at its price/earnings apex of 156 that preceded the 2001 tech stock rout).
A debate has broken out over the past few days between some economists who see the sinking of Chinese stocks as the bursting of a bubble and perhaps the prelude to a sustained recession, and others who attribute the sell-off to investor panic and profit-taking – and who are confident that the market will soon bounce back.
Regardless, the Chinese government, which has a great deal invested in the economic and social stability the stock market has brought to its people, has acted to help prop up the market and stem the losses. Among the reported steps: A ban on speculative short sales (in a statement last week, top economists blamed the market’s woes on “wealthy and sophisticated short sellers who are robbing small Chinese investors and ignoring risks of market instability.”), as well as, according to some sources, direct intervention in the stock market by the People’s Bank of China to support the market. In addition, a group of 21 of China’s top investment firms announced it was establishing a new 120 billion yuan ($19.3 billion) fund to support the market.
Those steps have had mixed results so far. While the Shanghai Composite Index of top 300 stocks actually rose on Monday, after the steps were announced, stocks were down 8% at the opening of trading Wednesday, while Hong Kong’s Hang Seng China Enterprises Index was down 6.3%.
The natural response to crisis is to “circle the wagons” — and for investors, that means taking stock of their personal situations and holding off on more exotic – including foreign – investments. With China so active in so many markets, and investing so much money around the world, economists fear that a chill in the rate of Chinese investments could by itself slow already fragile economic growth in Western countries and the developing world.
But Israel, said Peng, is a special case.
“Most of the investments from China in Israeli companies are not large,” he said. “Most of them are under $100 million, which is not a lot, at least by Chinese standards. If there is a change in investment levels, it will be a small one, because the Chinese firms that are investing in Israel need the tech they find there to innovate and compete in their own businesses.”
Cukierman is even more optimistic: “If anything, their experience at home will encourage Chinese investors to seek value abroad. The current stock market situation is a lesson to Chinese investors not to leave their eggs in one basket. Like for any other successful investor, diversity is key, and for Chinese investors that means investing in other countries that will mitigate their exposure to investments in their own companies. Israeli tech firms offer solid value, with normal valuations and price/earning ratios, so that is attractive to them.”
About to leave on a trip to China, Esther Loewy, who heads Upround Ventures, which connects Israeli start-ups likely to succeed in the Far East with investors, said that she hasn’t heard of any concern among potential investors she is set to visit.
“The interest in Israel is quite strong. They understand that there is robust technology in Israel specifically on growth areas of the Chinese tech economy, like health, Internet of Things and others. The need for Israeli tech is not going to be affected by temporary ups and downs in the Chinese stock market. As competition increases, there is a greater need for innovation, and the companies there know it – and they know they can find that innovation in Israel.”