REASSESSING THE BUSINESS ENVIRONMENT IN CHINA

Reassessing the Business Environment in China – the Challenges & Opportunities for Israeli Tech Companies

By Omri Hephner and Xiaowei Song

In March 2016 the National People’s Congress (NPC), the rubber stamp of the communist party, approved the 13th 5-years plan of China. People who follow up on China’s economy and politics were not surprised by the revelations, as usual, but it’s a good opportunity for doing a crucial task when working in such a dynamic environment as China – a constant re-evaluation of the situation. For us it’s a re-evaluation process but for those who aren’t so connected to what’s going on in the biggest economy in the world in PPP terms, this article may serve as an overview of the current macro economic challenges and the opportunities, which have recently moved from being theoretical to practical, for Israeli technology firms.

We will introduce the subject as follows: General comments on China’s economical situation and politics, then discuss the 5 years plan and finally – how we view the opportunities for technology companies.

Part I: The Duality of China’s Economy and Internal Politics / Governance

30 years of unprecedented growth in human history for a large-scale economy (averaging at 10% GDP grow per year) has created in China’s economy some major imbalances and unsustainable elements as will be discussed below. Such imbalances increased due to the fact that this growth was possible only in a centrally organized economy, led by the Chinese Communist Party (“CCP”) and the mirroring bodies in China’s state institutions and bodies – a planned economy versus a free market economy.

As a result, when you come to China to do your business today you will be facing a duality, more than a spectrum, of two Chinas:

On one hand – the old-new China, the China that has become the low-end manufacturing hub of the world, but on the other hand – a place where labor is not as cheap as it used to be but where the infrastructure is solid and logistics is much easier and more reliable than any other developing country.

You will find a new-new China where innovation is competing with world leaders in companies such as Lenovo, ZTE, Huawei and Tencent, such are the exception to the rule, which is – most companies, and notably the state owned ones, which are still sticking to the 30 year-old model of low end manufacturing and generic solutions, and are nowadays, under stress of extreme competition both internally in China and from other developing countries in the region, such as Vietnam and Bangladesh.

You will find a slowing economy, normal to the developing world, but still a country where business norms, the legal system and the use of English are in much lower levels than in a developing country.

You will find open mindedness crucial for innovation, especially in the young generation (for our purposes we consider a generation gap in China at 10 years maximum) and especially in cities like Shanghai and Shenzhen, and on the other hand you will find that the decision making levels, especially in state owned companies, is still run by the elderly and not the young and open minded.

You will find a government that is truly seeking innovations, entrepreneurship, developing a market oriented economy and the rule of law, but still a government that controls the press and the public agenda, suffers from lack of transparency and does not grant freedom, neither to the economy nor to the prosecution authorities, when it comes to matters of national interests or the CCP itself.

You will find that while most of China is still based on personal relationship and trust in doing business, in some places, notably in Shanghai, businesses are conducted based on due diligence and business evaluations.

You will see a CCP, the size of which has passed 82 million registered members, containing numerous talented individuals and plural view points, but a CCP that has been having difficulty moving ahead the needed reforms due to lake of strong leadership in previous years; Now, ruled by Secretary General Xi Jinping. We shall call him ‘Chairman Xi’, though the mirror position in the government is the President of China, but since the CCP control the country we shall skip the official state title for the purpose of this article. So Chairman Xi seems to rule China in a strong and centralized manner not seen since Chairman Mao, and though Mao’s years in power have not been beneficial to the country’s economy (that being understatement, of course) we do hope for progress.

This is the China of today in a nutshell. Navigating in the China seas requires discipline, patience, flexibility and a lot of faith. Having said all of the above, if there is one thing that should be noted, it is – be sure that nothing we write here comes as a surprise to the decision makers in China, they know it all too well and are doing their best to cope with it under the constrains which they understand better then any of us. In our view, President Xi’s tightening grip on power comes as a lesson from the previous administration that knew all it needed to do but lacked the power to enforce the policy changes due to conflicting interests in the ultimate decision-making body of China – the Politburo Standing Committee. However many in China disagree with us and believe Xi’s campaign is just a purging campaign aim to rid him of opponents for no cause other than ego or personal aspirations. Such people make the comparison to the Cultural Revolution which was lunched by Chairman Mao 50 years ago and had catastrophic results leaving more than 1 million people dead. While we disagree with such comparison, it should be noted that Chairman Xi’s anti-graft campaign has strong opposition inside the CCP, so much so that a few months ago such tensions erupted in public on the papers of CCP’s mouthpiece– Xinhua News Agency, an event that is, if not unheard of, then definitely extremely rare.

Part II: the 13th Five-Year Plan for 2016-2020

Preliminary notes on the actual discussion of the plan: 1. It’s not the plan that matters but the implementation and specific policies

The plan discusses high level targets, most of which are identical to those mentioned in the 12th FYP and previously announced plans such as ‘Made in China 2025’. What everyone here is looking forward to are the specific polices for sectors and region that will emerge in the coming months – the implementation plan. The FYP tell us little about that. We are looking to specific reform areas like the plans to reform state-owned enterprises, open areas, such as banking, telecommunication and transportation, to competition, the fair implementation of anti-trust law and anti- bribery laws as well as the execution of the new environmental protection enforcement regulations announced last February.

2. The Tension between GDP Growth Targets and Sustainable Growth

As mentioned in Part I above about the duality of China, for entrepreneurs and investors the GDP targets aren’t important as much as the specific industry and environment they are operating in. As will be discussed in details below, since what China needs for its sustainable growth is innovation and high technology manufacturing, the high tech offerings from Israel is tapping into the right side of the map. On these sectors the tech companies will enjoy government support as well as many strong local partners, and on the other hand, if you are into heavy and polluting industry, normally sectors suffering from oversupply and under plans for restructuring, then you better look for another country to do your business in. These duality in the different sectors will also be demonstrated in the annual growth potential – one may show double digit grow while the other will probably show negative growth.

Moreover, from macroeconomics prospective, the GDP target is potentially harmful for the sustainable growth for which the government is looking. A good example of that can be found in the recent cut from 25% to 20% of the requirement for a down payment for mortgage of first-time buyers of homes, announced late last year, as discussed in details in our previous article This is Why China’s Housing Market is Such a Mess As mentioned earlier – the government is well aware of the negative effects but is trying to balance the landing of the economy and prevent hard landing by using the short term mechanisms to boost the GDP growth and prevent it from falling too much on the shoulders of immature high tech and service sectors.

Some see self-imposed GDP targets as putting pressure on the local officials that then need to meet the targets even at the expense of long-term restructuring needed for sustainability. Such critics argue that in the constant trade-offs between short-term growth stability and restructuring for long-term sustainability, the former usually wins, thus implying a worrying long-term trajectory. Such critics will point us to the 12th FYP, which have mentioned the same or very similar reforms discussed now in the 13th FYP, but have, on the execution side, proven to be more focused on meeting GDP targets than on the long term targets of restructuring. After all, for the local officials it is much easier to prove GDP grow rate than not meeting the GDP target and explaining to their supervisors that they have done great on the long-term goals.

As mentioned earlier, the CCP/Government is aware of anything we will come up with, therefore it has its reasons; the main reasons for the Government’s insistence on meeting GDP targets, even at the price of sacrificing economic sustainability, are avoiding unemployment and the legitimacy of the CCP: (i) The CCP understands that when the economy grows enough, even if inefficiently and even if while creating increasing social disparity, there will still be enough to keep high employment rates, thus help to secure stability; (ii) Since nobody elected the CCP its main option for legitimacy during the past 30 years has been the economic miracle it has created. The CCP fears that lower GDP growth will cause the social tension to erupt when the weaker groups of the Chinese society will lose hope of bettering their lives.

This brings us to the more general discussion about planned economy versus market economy. Some argue that the 13th FYP should be the last one and that the local markets have become mature enough and too complex for the centrally planned economy that has served China so well in the past 30 years. Again, this was already an objective during the 12th FYP, but too little has been done, due to several reason, the most important one is probably the conflicting interests of important stakeholders in the reform process. In other words – as the reforms go though, some very influential people inside the CCP stand to lose a lot of money and/or power, thus are using their influence to slow down the reform process.

Moreover, and maybe the biggest difficulty here is this: The CCP got used to the idea that its grip on power is correlated to its control of assets such as the army and the big SOEs. It wasn’t always like this, under Chairman Deng Xiaoping, the great reformer who started the modernization of China more than 30 years ago, the CCP was in the process of decreasing the power of SOEs, understanding their inefficiency. However, after 1989 and the liberalization movement that came from universities that eventually lead to the Tiananmen Square protest and the violent suppression of the protest that followed, the CCP took a step back and kept increasing the powers of SEOs to the situation they are in today. Therefore, going back now is not only a great technical challenge but also a great mental challenge to the CCP.

3. 3. Chairman Xi’s Tightens his Grip on Power

As mentioned earlier, some say Chairman Xi’s grip on power is a welcome change that is needed in order to overcome the stagnation which had characterized President Hu’s administration, stagnation, which according to such critics have resulted from the struggle between the 2 fractions of the communist CCP.

Others argue that Chairman Xi’s anti-bribery campaign is merely aiming to get rid of competition and has little to do with his desire to reform China and better the lives of its people.

One thing is clear, although Xi’s grip on power is unprecedented since the Mao administration, China has not become a one-man ruled country overnight and Xi is not a new emperor. The two fractions in the communist CCP still exist and Xi knows well that he needs to regard his opponents and restrain them skillfully.

Moreover, it is yet to be seen if Xi will use his power to push ahead the much-needed reforms and it is still unknown how skillfully the execution of reforms will be even if Xi fully intends to implement them. While Xi has declared his intentions regarding the economic reforms as is presented in this document, we believe that political reforms must be implemented for various reasons that we will be discussed below. However this seems not to be on Xi’s agenda unless he intends to surprise us somewhere along the way. ‘Not likely’ would be an understatement.

The 13th FYP: Some details on the actual plan in light of the above-mentioned

This is Xi’s administration plan for the years 2016-2020: addressing China’s “unbalanced, uncoordinated, and unsustainable growth” and move toward building a “moderately prosperous society in all respects.”

The FYP put emphasis on the following 4 points for achieving such goals:

1. Innovation: 1. There is a crucial need to move from low-end manufacturing to local innovation and design. Moving China to high-end manufacturing and services has been discussed before as imperative for keeping China competitive on the global map. It seems that every passing year has proved to the decision makers that they need to do more and talk less. So innovation is the cornerstone of China’s future, but it remains to be seen how the government will implement such crucial needs into effective policies.

2. Open Trade: 2. The plan seeks to expand exports, increase outbound investment and enhance China’s role in global economic governance. The Free Trade Agreement with Israel that is about to be signed is one example for implementation of points 1-2 above. Others, like the Road and Belt, will be discussed further below.

3. Shared Development: 3. Addressing the issue of income disparity is one of the top priorities: As China developed throughout the past three decades many have been left behind. It is ironic in the eyes of many that a so-called communist CCP is leading a country with the biggest income gaps of all major economies. One issue that the Chinese government is addressing is how to reduce the economic disparity between rural and urban residents. The other is on more general terms – pursuing inclusive growth with the expansion of social services and creation of urban jobs.

4. Green Growth: 4. This is a repetition of the 12th FYP addressing China’s severe environmental degradation and the acute need to develop green and clean manufacturing industries instead of the polluting ones, moving to clean energy and developing the environmental services sectors. Under the 12th FYP enforcement of policies was the major obstacle in implementing the needed reform. In February this year new enforcement policies were released. Let us see how the actual implementation goes.

To achieve these broad objectives, what remains to be seen, and that is what every local businessman is waiting for, are the specific policies that are currently being drawn up by the local governments.

Moving from Economic Growth Target to Growth Range and the Challenges

As discussed earlier, we believe that setting growth targets is a problem by itself, a thing of the past that needs to be abolished from being a direct target and kept only as a lower red line. The underlined is not clear to me. Beijing understands this, but there are cultural issues relating to a mathematical target oriented society, such as China is, that are making it very hard for the decision makers to break away from this habit. What Beijing was able to do in this direction was to leave the fixed GDP growth number and move it to a limited range: Premier Li Keqiang announced the adoption of 6.5-7% GDP growth for 2016 and an average of 6.5% for the whole period until 2020. The lower redline of 6.5% discussed is what Beijing considers as the minimum needed for achieving its predetermined and arbitrary goals, double China’s 2010 average disposable income level and end absolute poverty by 2020. As you all understand, there is no economic reason why these goals must be achieved by 2020. It is politics, prestige and ego that dictates such specific dates and numbers, and in a challenging growth environment it may prove to be a bad idea sticking to such predetermined targets at the expense of flexibility and maneuverability. True, the range of 6.5-7% will provide more flexibility but in our opinion, this is far from enough considering the challenges of restructuring the economy, and we fear that under local cultural habits it will force the governments to both manipulate the numbers and derive growth from unsustainable sectors, as discussed above and in our previous article.

Last year China’s GDP grew the lowest in 25 years – 6.9%, and most economists we have spoken with agree that the current target or range will be extremely challenging if not impossible to achieve. Trying to reassure investors, Premier Li Keqiang explained that 2015 presented specifically challenging conditions and that that a 1.5% growth today equals 2.5% ten years ago. With all due respect, we think Premier Li is describing rather than presenting a relevant solution since this environment will become more challenging, as the 13th year plan will go ahead.

Some of the obvious and announced ways of supporting such growth objective will be to loosen fiscal policy, such as expanding the official budget deficit from 2.3% of GDP in 2015 to 3% in 2016. However, according to some research firms, considering the inclusion of government-managed funds and local government financing vehicles the actual deficit should be considered as rising from 3.9% of GDP in 2015 to 4.5% in 2016. Another more specific way is increasing the investment in infrastructure development. While there is no doubt that there is much more room for improving infrastructure in China, we think that focusing on efficient investment in innovation, which again, Beijing understands, is much more important. However implementation in China still lacks the ecosystem and cultural environment needed.

New Source of Growth – The Reform Agenda or The Long-Term Sustainable Growth

Below we will discuss the healthy long-term agenda, but as explain above, expect a tension in execution between this and the short-term growth that is expected to step in whenever annual growth targets are in “danger” of being missed:

1. Enhancing Innovation: Innovation is a cornerstone of China’s development strategy in the 13th FYP. This goal was a focus under the 12th FYP but execution suffered from inefficient allocation of funding, mainly related, in our opinion, to lack of experience, weak management and excessive government interference and guidance on the allocation funds and the management of the investments. For example, there are few cases in the world were government controlled incubations centers actually works. Experience shows that government arranged bids for innovations centers works best when run by private-professional organizations supported by government funds. While this is a wildly know situation, in China we still see an immature eco-system where government entities are focused on numbers rather than quality. For example, Tianjin plans to build 100 innovative hubs by the end of 2016, and Suzhou aims to build more than 300 such hubs by 2020. This number dwarves the 44 such hubs in San Francisco. Visiting and being invited to join some of such “incubation centers” we still see the reluctance to invest in innovation, rather than looking at such centers and real estate investment, hoping to return the investment from rent and taxes rather than from direct share in profits of the companies. Thus, many of these hubs lack the funding needed not only to incubate early stage technologies but also even to integrate more mature technologies from abroad into the China market. In terms of fixed numbers, Beijing is looking to increase its GDP spending on R&D from 2.1% in 2015 to 2.5% in 2020. Considering the challenges in efficient allocation of funding we believe this percentage increase is enough if only the allocation will dramatically improve, and on that we do not bet.

In our opinion, however, the main challenge in spurring innovation in China is that of a mindset which can most efficiently be tackled by changing the political system. It is difficult for the masses to tap into innovative thinking when all their lives they are told to obey, conform to the rolling CCP or to the elderly or to the needs of society. When the press is under censorship and order is the highest demand people will naturally be close minded, because opening it means potential trouble. Liberalization and a degree of chaos is needed for people to let themselves free their minds. Of course, in a 1.3 billion people country where people are not oppressed in the sense we witness in many of the countries in the Middle East, then the natural rebels can account for millions of people, but if the CCP wants to unleash the innovative potential of the whole population then they need to help break from thousands of years of Chinese tradition rather than keep repeating the same song over and over again – “reforms with Chinese characteristics” they like to call it. They need to find a way out of these characteristics and this is probably the most difficult task China is facing. Kids are brought up on the concept of not challenging authority because this is the Chinese way. Now the CCP, whose officials were brought up the same way, need to do a top-down reform which will spur innovation but will most likely mean the end of its rule not long after. Not many of us are willing to give up power for the greater good.

2. High-End Manufacturing: The 13th FYP emphasized the “Made in China 2025” and “Internet Plus” initiatives which are focusing on innovation and boosting emerging industries, including high-end equipment, cloud computing, mobile internet, bio-medicines and e-commerce, aiming to increase such industries proportion of GDP “significantly” and per capita labor productivity will increase 37.9% from 2016 to 2020. Again the fixed and challenging goals.

3. Creating Competition in Monopoly Sectors and Reforming the SOEs: Here lays a potential huge income for the Chinese economy that will be generated from improving efficiency of large parts of the economy. We expect opening previously monopolized sectors to some level of competition and private entrepreneurship, such as the telecommunication, transportation and banking markets. Another way to increase efficiency was revealed In September 2015 when Beijing released Guiding Opinion on Deepening the Reform of State-Owned Enterprises, aiming at the reinforcement of CCP (China’s Communist Party) and state control over SOEs, separation of SOEs into commercial and public interest enterprises, expansion of mixed ownership of SOEs, and creation of global players through mergers. However, it should be noted that very strong stakeholders resist these changes mentioned above, as one may imagine, and that they are challenging even Chairman Xi despite his strong hold on power. In our opinion this is one of the biggest challenges Xi’s administration faces in implementing their reforms.

4. Shifting Overcapacity Sectors to Underdeveloped Sectors: According to the 13th FYP China will cut down on production in overcapacity sectors, such as the steel industry, which is currently being subsidized by the government and which is responsible for much of the air pollution in places like Beijing. The plan is to cut down 100-150 million tons of crude steel production by 2020. In February 2016, Yin Weimin, Minister of Human Resources and Social Security, announced the creation of a RMB 100 billion ($15.3 billion) two-year fund to resettle and provide job training for these laid off workers. Currently on the agenda is the relocation of 500,000 steelworkers from the steel sector and 1.3 million coal-workers to underdeveloped sectors.

5. Fiscal and financial System Reform: During the 12th FYP local governments’ debt burden have significantly increased: According to an official central government audit that was released the local government debt increased from RMB 10.7 trillion in 2010 to RMB 17.9 trillion at the end of the first half of 2013. Much of the borrowing was done from what is called “shadow-banking” entities and local government financing vehicles, off the balance sheet of the local governments, and was used to finance central government sanctioned projects which could not be financed by tax revenues due to a fiscal system fault that now is being reformed. Until recently China’s fiscal system requires local governments to fund 85 percent of centrally mandated programs but only allocates 53 percent of tax revenue to local governments. This mismatch between local government revenues and centrally mandated expenditures has created a substantial rise in high-cost & short repayment term local government debt from local government financing vehicles. In order to address the issue the central government has established a debt-for-bonds swap aimed to reduce the debt burden on local governments both in terms of lowering the interest rates and extending the debt’s maturity term. Under such program, during 2015, RMB 3.8 trillion (USD 584.6 billion) of local government debts were replaced by bonds reducing the interest rate burden by around RMB 200 billion (USD 32 billion). If 2016 bond issuance will remain steady at RMB 3.8 trillion then by the end of the year 54% of local governments direct debt will be shifted into bonds paying lower interest and with longer maturity terms.

There will also be an increase of 12.2% in central to local government payments to help finance the expenditures.

In addition, starting this month, the value added tax amendment will become effective, expanding the VAT on sectors that previously were not taxed or paid very low VAT, such as construction, real estate, financial, and consumer service industries.

6. Expanding Domestic and International Trade: Under this reforms the government is seeking to expand inter-regional and international trade by creating special zones. On the international level Beijing launched the famous The Belt and Road initiative which includes the Silk Road Economic Belt and the Maritime Silk Road. To support these initiatives Beijing established the Asian Infrastructure Investment Bank (AIIB). Internally the creation of the Beijing-Tianjin-Hebei mega-region and the Yangtze Economic Belt was announced.

7. We think that The Belt and Road initiative and the AIIB aims imitate the Marshall Plan, or as officially know – the European Recovery Plan (ERP), under which the US had injected a USD 13B into European economies following World War II (1945-1947). However, there are major differences between these two situations to name a few: (i) Power: The US was much stronger and much more influential than what China is today – the funds it provided were about 10% of the respective countries annual GDP and in most of these countries people had suffered from hunger. China’s funds are much smaller as part of the countries GDP and the respective countries’ economic condition is much better of that which existed in Europe at that time; (ii) Legitimacy and Trust: The US was the great liberator of Europe and a democracy, which means that its aid was welcomed. However China does not enjoy the same legitimacy trust from the relevant countries.

8. New Environmental Protection Targets and Enforcement: Under the 12th FYP high targets were already set but enforcement was lacking due to the cost of implementation and resistance by important stakeholders. Now Premier Li vows for the strict enforcement of the law and severe punishments for the violators. Accordingly, new law on the enforcement of the environmental standards has recently been passed but how the actual enforcement will look still remains to be seen. The plan addresses many issues. We will not get into details here but will mention the following focus areas:

8.1. Addressing Water and Soil Contamination 8.2. Improving Air Quality 8.3. Reduction of Energy Consumption

Promoting Equality and Social Fairness

To many of us, who are living in China it sounds funny when people refer to China as a communist country considering the huge inequalities between the ultra-rich and the poor individuals and. While the past three decades of accelerated growth have lifted hundreds of millions of Chinese from poverty, there are still hundreds of millions left behind. According to official numbers recently released China is currently home to 70 million citizens living under the poverty line, but considering that the official poverty line in China is USD 376 in annual income (at 2010 prices), one can imagine that there are hundreds of millions of citizens that are living in very low standards. Thus, as any prudent government should act but more so one ruled by a party calling itself Communist, the CCP and central government are under pressure to improve social fairness. However, unlike on the industrial sectors of the plan, here most of the initiatives are missing quantifiable measures. Below we will mention the major social initiatives.

1. Accessible Education and Teaching Innovation: Here the plan is to make education more accessible by subsidizing the compulsory education (the first 9 years of school) for lower income households; currently each year costs more than USD 300 per student equal to 18% of the average disposable income in the rural areas. Other initiatives are to cancel high school tuition fees and vocational school tuition fees. Other programs are aimed at improving education for innovation in the universities and programs aimed to increasing the total numbers of undergraduate and graduate students.

2. Under the 12th FYP continued urbanization and housing reform efforts aimed at reducing disparity between rural and urban areas, created 64 million urban jobs and 40 million urban homes. Under the 13th FYP the target is to maintain these efforts and reach a 60% urban population comparing to 55% in 2015. In addition, further reforms to the Hukou system, which is the national household registration system, were introduced aiming to provide temporary residency permits to some 300 million migrant workers in the cities who currently do not have access to public services due to not having urban residency or Hukou.

3. Here the government has allocated budgets to fund plans aiming at eliminating total poverty by 2020, which means raising the remaining 70 million above the official poverty line discussed above. Another goad is to expand the social medical insurance to all of the population from 80% targeted under the previous plan. To reduce health-related costs over the next five years the annual government medical insurance subsidy for rural and unemployed urban residents will increase 10.5% to over $64 per person, covering around 70% of health-related costs. In addition, the central government will allocate nearly $2.5 billion nationwide for medical assistance and subsidies in 2016, a 9.6% increase over 2015. HIV medication will be provided free of charge starting in 2016, while other medication prices will be regulated to reduce costs. Besides the rural to urban disparity another major element of disparity relates to the aging population, which are people over the age of 60 and which is expected to reach 35.6% of the population by 2050. Funds will be allocated to increase pension payments to the elderly.

Part III: Implication on Israeli Technology Companies

After years of being flooded by delegations from China, of both of businessmen and government officials, many of us in Israel got tired and lost interest in meeting them. After all, there are 1.3 billion of them and only 8 million of us. However, we estimate that internal conditions in China have never been better for finding good partners and investors for technology companies and projects both in China and Israel. We short-listed the hot zones below:

1. Healthcare: Hot zones include: personalized medical services and drugs; gene therapy; home treatments and outpatient clinics equipment, or more generally – anything that can help reduce the pressure from the hospitals and move parts of the treatment, diagnostics or monitoring of patients out of the hospitals; elderly care; rehabilitation; Cancer related services and products. Israeli experience in managing medical services will have high demand, designing and consulting on the establishment of hospitals and clinics.

2. China’s labor intensive and highly pollutant agriculture practices is at the end of its cycle: the labor force is getting older as young people are not interested in being farmers and wages going up is one factor, and the other is the increasing pressure from the government to move into sustainable agriculture which does not pollute the environment. Food safety and clean food is another hot topic and anyone who can afford it will pay 2-4 times Tel Aviv prices for clean food. This creates opportunities to agro-tech companies both as investment target and for expanding their farming project business into China. With respect to farming projects we should note that from the Chinese side these include a substantial real-estate related incentive, as by introducing high tech farming they can receive a land use right for discounted prices, as opposed to not being able to receive any right at all which means price sensitivity is lower than normal.

3. High-End Manufacturing, new material and robotics: All are needed to upgrade China low-tech industry into efficient new industrial era thus companies in these sectors will be welcomed by investors.

4. Education: All major universities in Israel can find good partners in China, especially those focused on technological R&D, such as Weizmann Institute and the Technion. There are also many private sector initiatives, those focused on out-of-the-box thinking and innovative thinking are in high demand.

5. Environment – Clean Tech: China may be the only places in the world today where investment in clean tech companies is still in high priority, so we see opportunity both for doing projects with local partners and investment in Israeli clean-tech companies and getting distribution rights to China.

6. Others Technologies:There are many other technological segments – we will not go into all here, but some that should be mentioned are IoT (Internet of Things), Smart Home, big data analytics, entertainment and homeland security.

7. General Comment on Chinese Publicly Traded Companies: A lot of these companies are operating in declining fields and are desperately looking for new profit sources, so don’t be surprised when you see no correlation between current business and the business they state they want to get into. That being said, three elements that will increase the deal chances: (i) The investor should have a good link to and understanding of the relevant sales channels in China, either because it relates somehow to his current business and sales force or because he is joining forces with another party (in other words – you better be convinced the investor knows what to do with the distribution rights in China); (ii) If you are a profitable company then by acquiring 51% of your company the investor will be able to integrate the financial reports, and that will make the deal much more likely; (iii) Companies with existing sales channels and strong brands outside Israel will be very attractive assuming they can help the Chinese investor to expand his sales outside China. However, good technology and prospects are always in the center of the investors’ consideration.

Of course, the combination of the above usually suggest the company is not in the early stage, but these publicly listed companies usually accumulated a lot of cash and will prefer to pay more for more secure investment than less for early stage.

We hope this review has been helpful for you and we are happy to receive comments and feedbacks –you may send by email to: omri.hephner@spheresinvest.com.