China’s investment ambitions in Israel were dealt a blow this week, and analysts say the relationship is under increasing pressure, with the Middle East nation and key US ally caught in the rivalry between Beijing and Washington.

The Israeli government on Tuesday awarded the contract to build and operate a US$1.5 billion infrastructure project to local company IDE Technologies, rejecting an affiliate of CK Hutchison Holdings, which was founded by Hong Kong billionaire Li Ka-shing.

The project, Sorek 2, will be the world’s largest desalination plant, with capacity to produce 200 million cubic metres of water annually – a quarter of the water Israel uses each year – in the south of Tel Aviv near an Israeli military base that is also used by the US.

The decision was made little more than a week after US Secretary of State Mike Pompeo said the United States did not want the Chinese Communist Party to have access to Israeli infrastructure and communication systems during a visit to the country.

It is the latest setback for Chinese investment in Israel – a tech powerhouse and key stop on Beijing’s Belt and Road Initiative – since the two countries signed a “comprehensive innovation partnership” agreement in 2017.

Israel’s national security cabinet was reported to be revisiting a 2015 deal between the Israeli Transportation Ministry and Shanghai International Port Group involving the Port of Haifa, which regularly hosts joint US-Israeli naval drills and vessels.

In addition, the Israeli Security Agency reportedly blocked the inclusion of Chinese companies in Israeli communications infrastructure after receiving warnings from senior US officials including President Donald Trump. Israel had set up a committee to review foreign investment – not specifically Chinese – in October, but it was not enough to satisfy US officials.

Carice Witte, founder and executive director of the Sino-Israel Global Network and Academic Leadership, said the worsening relationship between China and Israel was a bellwether for the geostrategic space.

“Whether or not there are security concerns, the more important point to recognise is that China is not in a position to provide the military support and cooperation that the US provides to Israel – a tiny Jewish nation with 130,000 missiles pointed at it from other countries,” Witte said.

“If there is anything that does alarm Israel it is likely the same concern shared by most of the world – the intensifying great power competition between its two biggest trading partners and what that power play means for the future of the world.”

A research report by US-based think tank Rand Corporation in April said the United States should be concerned by Chinese investment in Israel that could give China a military and economic edge.

“Since 2013, Chinese companies have increasingly become more involved in Israel by purchasing Israeli companies and successfully bidding on key infrastructure construction projects,” the report said.

“Such activity has been significant in the hi-tech sector, in which Chinese investment of venture capital doubled from US$500 million in 2014 to US$1 billion in 2016. Israeli tech start-ups received Chinese investment of US$325 million in the first three quarters of 2018, up 37 per cent from a year earlier,” it said.

The report said China’s overseas investment had shifted from energy, mining and manufacturing to hi-tech industries such as artificial intelligence, robotics and information and telecommunications technology.

After examining 92 business deals in Israel by Chinese companies between 2011 and 2018, the report found 11 that potentially raised concern for Israel or the United States, including the expansion of the Ashdod port, partial construction and operation of a new terminal by the Haifa port, construction and operation of the Tel Aviv light rail, and the digging of the Carmel Tunnels near Haifa.

Ehud Gonen, a researcher with the Maritime Policy and Strategy Research Centre at the University of Haifa, said Israel was a small country with a complex security environment that must take US attitudes into consideration.

“Israel is a small economy with limited local markets that must have trade and foreign direct investment,” Gonen said. “We would like to see as much FDI as possible, also from China, but China has to make moves to address the security concerns of its investment – not only in Israel but all over the world.”

Yoram Evron, a senior lecturer with the Department of Asian Studies at the University of Haifa, said as US-China tensions rose, more cooperation between Israel and China would come under pressure because it was deemed “sensitive” by Washington.

“Israel has a clear interest in having a relationship with China in many areas, both politically and economically, considering China’s rising profile in the world and presence in the Middle East,” Evron said. “Possibly for the same reason, Washington is not happy with it.”

He said the US had learned that the best way to kill a project it did not like was to nip it in the bud, as it would be difficult to stop a civilian project after the contract had been signed.

“Unfortunately the relations [between China and Israel] will be affected and positive momentum with China will experience a setback,” he said.

Shira Efron, a visiting fellow at the Institute for National Security Studies in Tel Aviv and an author of the Rand report in April, said Israel was in a difficult position, caught in the middle between the US and China.

“Israel itself is not exerting pressure on China but is itself under US pressure and is forced to appear as if it is dialling back its ties with China, at least temporarily,” Efron said. “That is because if forced to choose sides, Israel has no dilemma but will pick the United States, its most important strategic ally.”

But she said Israel did not want to take sides.

“Instead, it hopes to reassure Washington that it is heeding its concerns and at the same time maintain its economic, cultural and academic ties with China.”