China's efforts to open up its economy have not been enough to improve foreign companies' access into the domestic market, according to a paper released on Tuesday by the European Union Chamber of Commerce in China.
One major hurdle that foreign firms operating in China face is the presence of Chinese state-owned enterprises, the paper said. Those firms, also known as SOEs, receive preferential treatment from the government such as priority to get financing — and that special treatment distorted competition in many industries, according to the report.
The situation has worsened in recent years with the Chinese government "pursuing SOE reform with Chinese characteristics," it added.
"Rather than cutting SOEs down to a manageable size, determining the industries that would be most appropriate for them to operate in and privatising the rest, the goal has been to make them 'stronger, better and bigger'," Joerg Wuttke, the chamber's president, wrote in the report.
Speaking to CNBC's "Squawk Box Asia" on Tuesday, Wuttke said China has made some inroads in terms of restructuring its economy in recent years. But the authorities have appeared to support growth by pumping more money into the economy, not by making the much-needed reforms, he said.
"Sometimes, you want actually China to wake up and see you can't only throw money at the economy. You actually have to change the structure," he said.
"It's not that the country is in a stalemate, but we're also seeing that opening up is pretty much impaired by interest groups that don't want foreign competition. We believe now is the time to do it because of the economic headwinds," explained Wuttke.
China's SOE reforms
Growth in the Chinese economy — the second largest in the world — is slowing down at a time when its trade war with the U.S. looks set to drag on.
Several economists have warned the tariff dispute will hurt the Chinese economy more than the U.S. because the Asian country is relatively more trade-dependent.
Given such headwinds, it's time for the Chinese government to focus on making the economy more competitive, said Wuttke. He pointed out that China has had some success in liberalizing its economy in the southern Guangdong province.
China developed its first special economic zone in Guangdong, which attracted foreign investors and allowed businesses "to pursue their own ambitions," according to the paper. That helped the province to grow faster than some northern provinces, where SOEs still dominate the economy, said the report.
"Old habits are the hardest to break," the paper said. "Strong vested interests have stood against meaningful SOE reform in the past and they will certainly continue to have an influence in this respect."
"However, failure to address SOE reform and advance economic liberalisation will leave the market burdened by a bloated and inefficient state-owned sector that weighs the country down as it attempts to climb out of the middle-income trap."