EU business lobby warns of protectionist backlash if China doesn't open market

By Michael Martina

BEIJING (Reuters) - A top European business lobby warned China on Thursday that it risked a protectionist backlash unless it opened its markets faster to foreign investment, saying the current unbalanced access for foreign companies was "not politically sustainable".

Progress on China's economic reforms has been "highly disappointing", the European Union Chamber of Commerce in China said in an annual paper, released as China prepares to host leaders from the world's biggest economies at this weekend's G20 summit.

Beijing wants to use the Sept 4-5 meeting in the tourist hub of Hangzhou to lay out a broad strategy for global growth, though talks are likely to be overshadowed by concerns such as protectionism.

China was angered by Australia's recent blocking of an A$10 billion ($7.7 billion) sale of the country's biggest energy grid to Chinese bidders, and by Britain's delay of a $24 billion Chinese-invested nuclear project, saying the hurdles smacked of protectionism and paranoia.

But business groups and Western officials point out that restrictions on foreign companies in Chinese industries, such as financial services, healthcare, and logistics, are often far greater than what Chinese firms face abroad.

"This unbalanced situation is not politically sustainable and for its own benefit China should begin reciprocating by opening up and allowing European business to contribute more to its economy," the Chamber said, adding that doing so was needed if China was to avoid a middle income trap.

Chamber president Joerg Wuttke said he was worried about protectionist sentiments brewing among European officials as a result of China's slow progress in opening markets.

"We worry that China might unleash protectionist forces, which none of us want to see," Wuttke told reporters ahead of the paper's release.

Chinese Foreign Ministry spokeswoman Hua Chunying said China remained an ideal country for investment for the world, including from the EU.

"China's policy on using foreign investment will not change. We'll continue to create a good environment for investment from all countries," she told reporters at a regular briefing.

China has sought to address slowing growth by promoting innovation in strategic industries, such as information technology and robotics.

Beijing's "Made in China 2025" plan calls for a progressive increase in domestic components in such sectors, leading foreign firms to worry they will face increasing hurdles in China contrary to officials' vows to open markets.

The Chamber said the government's increasing role in directing capital to such industries "will not allow China to realise its full economic potential" and warned that waiting to carry forward reforms until after an important congress of the ruling Communist Party in 2017 would have "significant costs".

"If it is ultimately unwilling to offer reciprocal access to its own market, China cannot assume that it will indefinitely continue to enjoy open and unhindered access to the EU's," the Chamber said.

(Reporting by Michael Martina; Additional reporting by Ben Blanchard; Editing by Simon Cameron-Moore)