Shanghai stock woes mean closer Israel-China ties, says expert

As the continuing losses on its stock exchanges indicate, China has a problem – and the world’s most populous country is looking to little Israel for help in solving it, according to China-Israel investment expert Andrew Zhang.

“China’s current stock woes are due to the realization by investors that the era of rapid growth based on industrial production and government infrastructure spending has come to an end, and right now there is nothing to replace it. The only viable replacement for these growth vehicles is high-tech, and that is one reason China is very interested in Israel,” he said.

While economies around the world, from the US to Europe to Israel itself, have their own problems, analysts said that investors in those countries have come to the realization that their economies are in relatively good shape – as evidenced by the rises in the stock markets of Europe and the US in early trading Tuesday. In Israel, stocks were up as well, as local investors saw the positive performance of American and European stocks.

That is not the case in China, said Zhang. “A few months ago there was a big selloff on the Shanghai Stock Exchange, but those losses were somewhat reversed. This time, though, it looks like the real thing – a realization by investors and government officials alike that the policies that led to ten percent-plus annual growth for the past two decades just won’t work anymore.”

Still an industrial powerhouse, China has been losing manufacturing business in recent years to countries like Vietnam and Bangladesh, where workers make less money than their Chinese counterparts. That trend has been going on for several years, and to partially make up for the loss of manufacturing business (and to kickstart the economy after the 2008 worldwide recession), the government put huge sums of money into construction projects – to the extent that whole cities have been built just for the sake of building them, with homes, offices and factories going unbought and unoccupied.

The latest stock crisis was kicked off last week, as China made a technical move that effectively devalued its currency against the dollar making Chinese goods cheaper abroad, with the government apparently hoping it could revitalize manufacturing, at least to some extent. But the move panicked investors around the world, especially those in the US, who feared that a new wave of cheap Chinese goods arriving on their shores would reverse the fragile progress on growth and job creation that the US has been experiencing in recent months, as the economy makes a steady, but very slow, recovery from the 2008 recession.

With the currency adjustment apparently backfiring, China has run out of cards to play; pumping billions more into the existing growth models may work as a stopgap, but it’s not a long-term strategy, said Zhang. “Even if they manage to stabilize things, investors have gotten the message – that China doesn’t have a growth model, and that unless it finds one soon, the country is going to be facing major problems in the near future.”

Like many countries around the world, the growth model China is looking for is in technology development – developing a start-up economy, where innovation leads to new products and services that create new industries.

“The problem is that it takes a long time to develop that kind of economy – maybe generations – and China doesn’t have that kind of time,” said Zhang. “Tech is the real growth engine, but implementing that strategy is much easier said than done.”

China’s need to innovate and build a tech economy is a major reason for its interest in Israel. Indeed, many Israelis are aware of the recent interest China has taken in their country, but few are cognizant of just how interested it is. Over the past two years, said Edouard Cukierman, chairman of Cukierman & Co. Investment House and managing partner of the Israel and Hong Kong-based Catalyst Investment Funds, China “has become the number one investor in Israel. For them, Israel is a great source of technology to help them develop their economy, while for us, it’s a fantastic opportunity to gain entry into the biggest market in the world.”

At the first-ever Israel-China Economic Summit, in May 2014, over 1,000 business and government officials came to Israel to see up close how the Start-Up Nation operates. Among the attendees was Chen Gang, mayor of Xiang He City, located outside of Beijing. On his first visit to Israel, Chen was just getting to know Israeli high-tech, but was already very impressed.

“I knew Israel was a leader in technology, and I also knew its accomplishments were out of character for a nation of its size — with the kind of technology you would expect only in bigger countries — but you have to come to Israel to understand what the term ‘Start-Up Nation’ really means.” Words alone, he said, cannot express the level of innovation and entrepreneurship in Israel.

With their economy so dependent on exports, Israelis are thrilled at the prospect of being able to export technology to the world’s second-largest economy. “It’s a two-way street,” Cukierman said. “As much as we are helping them, they are helping us.”

Cukierman has done his part to promote the Israel-China business relationship; he is one of the founders of the Catalyst Everbright Fund, a joint fund managed by Israel’s Catalyst Equity Management and Hong Kong-based China Everbright focusing on investments in agriculture, industrials/manufacturing, healthcare, water, energy, technology, media and telecommunication, among others, handpicked for their potential success in the Chinese market. The fund secured more than $100 million at its first closing in March 2014, and is targeting $200 million-$300 million for its final closing.

While it’s likely that Chinese investors will take a wait and see attitude until the dust settles at home, said Zhang, they are still looking for opportunities – and investing in them.

“I work with several Chinese investment firms as a scout, helping them find Israeli tech firms to invest in, and even now, in the midst of the stock market crisis, my clients are telling me to go full force and find them good opportunities,” said Zhang. “The Chinese – investors and governments alike – are realizing that a tech economy, like the one Israel has, is their best growth option, and in the coming years, this is going to be good news for both Israelis and Chinese.”