U.S. Official Warns Israel About Chinese Investors Amid Crisis

(Bloomberg) -- A key U.S. official said Israel is among the countries that need better screening of foreign investment to guard against having their companies turn toward China during the economic downturn sparked by the coronavirus pandemic.

“One of the preliminary takeaways from this crisis is that we have to be more cautious in our dealings with China,” U.S. Assistant Secretary of State for Near Eastern Affairs David Schenker said in a phone interview. “There are firms out there that are desperate for capital and could become targets for predatory investment.”

The rhetoric is heating up again between the world's two biggest economies, with President Donald Trump escalating efforts to pin blame on China for unleashing the pandemic and exploring ways to hold it accountable. Tensions are also playing out elsewhere, with the European Union ushering in the first continent-wide rules for screening takeovers on security grounds.

Chinese companies backed by the government's financial muscle are already hunting for bargains in Europe, prompting EU countries to increase their powers to veto investment from outside the bloc. Canada is also among countries stepping up scrutiny of foreign investment amid the crisis.

“We've taken steps,” Schenker said. “Some of our partner nations have taken steps to bolster investment-screening efforts of late but Israel could also be welladvised to add some of these mechanisms as well.”

Not Enough

After coming under pressure from the U.S. to better scrutinize potential investment from China, Israel last October said it would form a new advisory panel to vet the national security aspects of foreign investment. Schenker said Israel's new process still falls short because it doesn't cover the field of high technology and is voluntary.

“It's necessary but I think they can do a whole lot better and I think they should,” he said.

Others have also raised concerns over the new Israeli body, which was established when an interim government was in charge. A Rand Corp. report published this year said “the committee will likely have legal and structural challenges” and “might not fundamentally change the regulation environment.”

China is a key economic partner for Israel. It plays a major role in local infrastructure projects and is the country's second-largest commerce partner with $11.8 billion in annual trade between the two sides.

But its role in the Israeli economy has come under pressure during Trump's administration, with U.S. officials urging Israel to rethink China's reach. America is Israel's top strategic ally, and the U.S. has said intelligence sharing and other forms of cooperation could be at stake.

Axios reported over the weekend that U.S officials asked their Israeli counterparts why a Hong Kong-based company's bid to build an Israeli desalination plant didn't go through the screening committee. Schenker declined to comment on the specific project.

Schenker singled out a recent U.S. law known as FIRRMA -- which strengthened the Committee on Foreign Investment in the U.S. to include some non-controlling investments and real estate deals -- as potentially worth adding for Israel.

“We are working with the Israelis, talking to them about lessons learned,” he said. “But I think now in the aftermath of Covid it should highlight to all of us just how important it is to have these types of mechanisms in place.”