China is backsliding on reforms to open up its economy to foreign business, thereby hindering competition and imperiling its shift to a new model of sustainable growth, the European Union Chamber of Commerce in China said on Wednesday.

In its annual position paper, the chamber said government intervention in industrial policy and restrictions on foreign investment had been on the rise in the last three years, making China less and less attractive to European companies.

The reform drive has to be kick-started again, Joerg Wuttke, the group's president, told a news conference.

The chamber said the 1,400 firms it represents remained optimistic about China and their own prospects.

However, right across industries, European businesses are still impeded by issues concerning market access, legal and political transparency and the protection of intellectual property rights.

The specter of protectionism has also appeared, and European companies are increasingly concerned by the tendency for local companies to be favored over foreign-invested ones, it said.

The failure of the world's top five wind operators to have a single national wind development project in China is just one example the chamber gives in arguing that foreign firms face discrimination.

Wuttke said foreign firms had been systematically excluded by a bidding process that is designed to favor domestic companies because it looks only at the initial cost of a turbine rather than the all-in cost over its 25-year life cycle.

By failing to create a level playing field, Beijing was hurting not just foreign business but its own prospects.

European businesses remain convinced that the key driver of long-term economic development is the creation and promotion of freer and fairer market conditions for all companies in China, the report said.

Sweeping measures to further reform and open up the economy after the 1997/98 financial crisis led to China's accession to the World Trade Organization in 2001, which had given a big boost to growth.

However, in recent years, the European Chamber has noted a gradual slowdown -- and in some cases a partial reversal -- in the opening-up process, the report said.

If China shuns the fundamental reforms needed now, its competitiveness would suffer and it could fail to reach its growth potential of 6-8 percent a year over the next decade, the chamber warned.

(Reporting by Alan Wheatley; editing by Ken Wills)

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