In 2004, a diplomatic dispute between Israel and the U.S. erupted over the sale to China of the Falcon advanced reconnaissance aircraft. The aircraft was built and developed by the Israel Aircraft Industries and did not contain any American technology, yet the U.S. was instinctively against providing the Chinese military any advanced technology that could give the Chinese an edge over its allies in the Far East. The deal was cancelled, and the Chinese were furious. Israel ended up paying the Chinese a huge sum of money as compensation.

Almost a decade later, the three countries are on the verge of another diplomatic dispute, and the Chinese are enraged once again.

Our story begins with Israel’s war on terror. One of the lesser-known tactics Israel applies is tracking and disrupting the flow of money that funds the various terror organizations it is confronting. Israel has spent a large amount of resources on finding the money laundering operations and back channels used by Fatah, Hamas, Islamic Jihad, Hezbollah and others, to finance their operations against Israel. Once identified, Israel then uses every tool in its kit to close these channels – if by applying overt diplomatic pressure, or by using more covert methods that involve the Mossad.

In 2006, Daniel Waltz, an American citizen, was killed in a terrorist attack in Tel Aviv. Not long after, Israel’s security apparatus discovered that a money laundering network in the south of China was funneling money to Hamas and Islamic Jihad in Gaza using the Bank of China, one of the big four state-owned commercial banks in China. The Chinese courteously listened to subsequent Israeli requests to close the bank accounts holding the funds, yet did nothing.

As it had done in the past in other cases, Israel encouraged the Waltz family to sue the Bank of China in a New York court for funding terrorism. Israel promised the family that the allegations would be backed up by the testimony of a former Israeli intelligence agent who claims he personally warned the Bank of China that terror organizations were moving money to build bombs and pay suicide bombers who would eventually kill hundreds.

The Chinese were not impressed by this move. The Bank of China denied any knowledge of the 17 bank accounts that Israel claimed were involved in funding terrorism, and also denied any request by Israel to close them. In the meantime, they asked the Palestinians to close the problematic accounts.

In comes Prime Minister Netanyahu. Before his visit to China in May, the Chinese demanded Israel promise them that it would not allow the testimony in court of the intelligence agent, or any other government employee for that matter. Netanyahu gave this commitment.

The Chinese rushed to court with Netanyahu’s commitment in hand, and the court demanded clarifications from Israel. Israel’s laconic reply was that the matter was being discussed. As things stand now, this is still Israel’s official response.

While Israel dilly dallies in its response, the lawyers of the Waltz family have stepped up their effort. Last month, the former intelligence agent, who happened to be in the U.S. on business, received a subpoena to appear in court and testify in November. The family is now also threatening to subpoena all the Israeli officials involved, including Israel’s next ambassador to the U.S.

The Chinese are also not happy with Israel’s delaying tactics, and expect an immediate announcement declaring that the testimony is cancelled. If this does not happen, the Chinese are threatening to cancel a number of economic and security deals. In a direct and personal message to Netanyahu, the Chinese reiterated their demand: “You promised that no employee, in the past or the present, would testify. This commitment enabled your visit to China. The Chinese government expects you to fulfill this commitment.”

I don’t envy Netanyahu. Cornered by his war on terror philosophy and American pressure, on the one hand, and by Israel’s new strategy of strengthening its ties with the Chinese superpower on the other, he is truly between the hammer and the anvil.

From a wider perspective, this developing story has ramifications beyond bank account and lawsuits. Identifying the relative decline of the U.S. while recognizing the parallel rise of China, Israel has decided not to place all its eggs in one basket. By strengthening its ties with the awakening dragon, Israel is preparing itself for a rainy day. Up until now, China has been extremely cautious not to step on American toes in the Middle East. Having identified America’s slow and gradual withdrawal from the region, it has now begun to be more assertive. So while I don’t have the faintest idea on how Netanyahu plans to extract Israel from the conundrum described above, I am sure that we will be hearing more and more about China in the Middle East. If you don’t believe me, search for “China” and the “Middle East” in Google.

* The details of this case are being covered by Nahum Barnea and Shimon Shiefer, Yedioth Aharonot.