By Felicia Schwartz and Dov Lieber 

TEL AVIV -- Security officials are raising alarms over Chinese investment in Israeli technology companies, prompting the Israeli government to scrutinize the money flows and businesses to reconsider accepting Chinese funds.

Israel is moving to create an interagency government body to oversee sensitive commercial deals involving foreign companies, U.S. and Israeli officials said, akin to the U.S.'s Committee on Foreign Investment, or Cfius.

The effort has been under way in recent months but has taken on added urgency amid recent complaints about Chinese investment from American and Israeli security officials, including national security adviser John Bolton and Israel's domestic spy chief, U.S. and Israeli officials said.

U.S. and Israeli officials said they are especially concerned about stepped-up Chinese investments in Israeli companies whose products are dual use, meaning they have both military and commercial applications, such as drones and artificial intelligence. They also worry about China using Israeli companies as a way to uncover U.S. secrets and about Beijing transferring Israeli technological know-how to its ally, Iran, an arch foe of Israel.

Officials said they worry that Chinese government entities could gain access to sensitive information by gaining control over and insight into companies that are in the dual-use space.

Mr. Bolton and other American officials have warned in recent visits that the investments in Israeli technology could hinder intelligence ties. American officials said they have offered to help set up the regulatory body.

Several business executives and security officials said the Trump administration's renewed focus on China has made such scrutiny a higher priority in Israel.

"We are all concerned about theft of intellectual property and Chinese telecoms companies that are being used by China for intelligence gathering purposes," a senior Trump administration official said.

The Israeli prime minister's office, which is overseeing the creation of the body, declined to comment.

With few deep-pocketed investment partners outside of the U.S. and Europe, Israel has for years welcomed Chinese money as Beijing embarked on a long-term plan of cementing its global influence with loans and business partnerships.

Concerns about Chinese investments flared in 2015, when state-controlled Shanghai International Port Group won a government contract to build and operate Haifa's port for 25 years. The worries have accelerated with the global rise of telecommunications giant Huawei Technologies Co. -- which the U.S. government accuses of spying for Beijing -- and a blitz of Chinese investment in Israel's vaunted tech industry.

Chinese investors participated in 12% of deals in the first three quarters of 2018 with Israeli tech companies, reflecting an increase over the past three years, according to a report by the IVC Research Center, which tracks the Israeli tech industry. U.S. and Israeli investors account for a much larger share, generally about one-third of deals each annually, according to IVC.

In the first three quarters of 2018, according to IVC, Chinese investors were involved in all 17 financing rounds for Israeli startups of $20 million or more.

Efraim Halevy, former director of Israel's spy agency, the Mossad, said the country has been slow to recognize the security threat that Chinese investment represents, and said it is especially worrisome in dual-use products.

"That is a very dangerous area," said Mr. Halevy, who supports continued Chinese investment in Israel but wants it vetted for national security.

American officials have pressed allies in Europe and elsewhere not to let Huawei monopolize telecommunications infrastructure, portraying the company as a serial violator of U.S. laws and global business practices. Huawei doesn't have a major presence in Israel, but Washington is worried about the firm's interest in the country. Huawei has been developed technologies, some potentially sensitive, through a locally registered company called Toga Networks Ltd.

Chinese officials have dismissed such warnings as "ridiculous," accusing the U.S. of invoking national security to harm normal commercial activities.

"The U.S. has been abusing the idea of 'national security,' slandering and striking down the normal commercial activities of Chinese enterprises," a Chinese foreign ministry spokeswoman said in January.

Huawei has denied allegations that the company spies on the Chinese government's behalf.

Israel is already home to 12 Chinese trade offices from 11 cities across the country. They aim to foster investments that go both ways, including funding Israeli companies that in turn set up offices or share technology in China.

Weijan Chen, director of the city of Dongguan's Economic and Trade Office, said his city is seeking to invest in automation, biomedicine and telecommunications in Israel. Mr. Chen's office in Tel Aviv is just one of two investment offices world-wide for Dongguan, one of China's most important manufacturing cities. The other is in San Francisco.

"We don't have any problems due to U.S. pressure," Mr. Chen said, calling Israeli companies and government officials "very friendly." "Israel is also very interested in the Chinese and the Dongguan market and want to work with us."

Israeli executives said their government and U.S. investors have stepped up pressure to steer clear of Chinese investment.

"Small Israeli companies are saying we are not sure we want to take investments from China because we don't want to be locked out of the U.S.," said Sam Chester, a Tel Aviv-based consultant who helps connect Chinese investors and Israeli tech companies.

Others say China is too big to turn down, and that potential concerns can be mitigated.

Doron Myersdorf, chief executive of Storedot, which makes fast-charging batteries for electric cars, phones, laptops, drones and other devices, said his Israel-based company has taken funds from Chinese investors in several rounds of financing, including from those with state ties.

He will also produce a preliminary version of the product there, he said. He would prefer to take his product into mass production in the U.S. but found it easier to establish factories in China, where there is an established supply chain for sophisticated batteries.

The downside: Mr. Myersdorf said he has seen an uptick of Chinese delegations apparently seeking trade secrets or other information about his business that has dual use applications.

"It comes under the guise of, 'We want to invest a large amount of money, '" he said. "They try to come for a very intense and detailed due diligence process."

--Vivian Salama in Washington contributed to this article.

Write to Felicia Schwartz at Felicia.Schwartz@wsj.com

(END) Dow Jones Newswires

February 11, 2019 05:44 ET (10:44 GMT)