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BEIJING (Reuters) - China should abandon a top-level strategy promoted by President Xi Jinping to increase self-reliance, or risk harming innovation and growth prospects, said a European business group on Thursday.
"There are troubling signs that China is increasingly turning inwards ... and this tendency is casting considerable doubts over the country's future growth trajectory," the report from the European Chamber of Commerce said.
A desire for political control and a "fear of volatility" are to blame, Chamber president Joerg Wuttke said at a briefing.
China has been trying to cut its dependence on overseas markets and technology in its long-term development, a shift brought on by a deepening rift with the United States, in a so-called "dual-circulation" strategy.
Continuing policy support for state-owned companies, the "unsettling" influence of national security concerns on economic policy and efforts to increase control over the private sector, will drag on innovation and efficiency, said the report.
"Although the costs of such an approach may not be felt for several years, they are considerable and should not be overlooked."
Dual circulation will require China to "deviate from the spirit" of the 1970s reforms that opened up the country's economy and spurred decades of rapid growth, it said, resulting in less foreign investment, misallocation of resources and growing push-back abroad.
"China runs the risk of punching below its weight," said Wuttke.
China's policymakers have stressed the country will continue to open up and welcomes foreign firms.
While some foreign companies, such as those in the chemicals sector, which have technology China needs, are encouraged, others are not, the Chamber report said.
Some foreign suppliers of network equipment and services have told the Chamber that "market exit is inevitable" due to increased scrutiny on the grounds of national security. Suppliers of health equipment, for example, are sometimes unable to sell as hospitals try to "buy Chinese", said Wuttke.
The report also urged China to de-escalate tit-for-tat sanctions against Europeans that are holding back the ratification of a key investment agreement with the European Union.
The bloc had imposed sanctions on Chinese officials over alleged human rights abuses in the western region of Xinjiang, to which Beijing responded with its own sanctions on Europeans including European lawmakers.
The bloc's executive arm, the European Commission, unveiled plans in May to cut dependency on Chinese and other foreign suppliers in six strategic areas.
Foreign companies contribute to significant chunks of China's tax revenue, trade and employment, said Wuttke, and in turn China remains a key market for European companies which helped prop up operations during the COVID-19 pandemic.
"In many cases...the China operations are the ones that stabilize headquarters and basically bring business to the group," he said.
(Reporting by Gabriel Crossley; Editing by Alex Richardson)