China is already embroiled in one trade war with the United States. Now, it could face another economic conflict with the European Union.

An influential report released by the EU Chamber of Commerce has warned that the world’s largest trading bloc should take “defensive” measures to protect Europe’s single market unless Beijing implements “competitive neutrality” and “reforms” its state-run model.

In the study, the European business lobby group called for direct action to curb the power of sprawling state-owned enterprises.

“Rather than cutting [China’s] SOEs down to a manageable size, determining the industries that would be most appropriate for them to be operated in and privatizing the rest, the goal has been to make them ‘stronger, better and bigger’,” Joerg Wuttke, the president of the EU Chamber of Commerce in Beijing, wrote in the European Business in China – Position Paper.

To add salt to the wound, he was quoting Chinese President Xi Jinping when he urged SOEs to become “stronger, better, and bigger” at the 19th Communist Party Congress in 2017.

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Since then, bloated state-run industries have continued to be force-fed on funding and major contracts, devouring investment from the private sector and freezing out foreign competition.

The report even went on to accuse Xi’s government of flouting global economic governance standards and fuelling rising Sino-US tensions by using a “resurgent state-owned economy.”

“In the event that China does not follow through with SOE reform and competitive neutrality, in the coming years, such measures will be necessary to protect the EU market,” the report pointed out.

“Fail-safe” policies should be introduced by Brussels to speed up Beijing’s “opening up” policy, the study added, such as strengthening scrutiny on Chinese overseas investment and investigating barriers to EU firms in China’s public procurement market.

“The European business community has witnessed previous Chinese leaders pursue bold economic liberalization over the last four decades and believes that [the] accumulated experience, as well as [the] far more sophisticated regulatory system, now put China in a strong position to move towards installing a free-market economy,” the position paper highlighted.

If nothing else, the study should act as a wake-up call for the world’s second-largest economy and the country’s policymakers.

GDP growth was close to a 30-year low at 6.2% in the second quarter as the trade dispute with Washington escalated.

For more than a year, the fallout from the row has acted as a brake on China’s slowing economy, which has been engulfed by dismal data during the past three months.

In August, growth dipped again across a broad range of sectors, from retail sales to industrial output, which plunged to a 17-year low. Big-ticket items such as new car sales have stalled while residential property prices have also suffered as consumer debt increases.

Moreover, the downturn is gaining pace just when Xi’s government is realigning the state-backed economic model to high-tech manufacturing and services. Consumption, not cheap low-value exports, is pivotal to Beijing’s blueprint.

‘Promise fatigue’

“With a possible crisis looming on the horizon, it’s now the time to walk the talk,” Wuttke told a media briefing on Tuesday in reference to China’s “opening up” and “reform” mantra.

There is undoubtedly a feeling in Brussels of “promise fatigue” to quote the EU Chamber of Commerce. But the size and scale of the bloc make reaching a consensus among the 27+1 member states challenging with Brexit on the horizon.

So far, Beijing has signed agreements to pursue infrastructure projects, linked to the controversial Belt and Road Initiative, with 14 EU nations, such as Italy, Greece, and Portugal. China is also a major source of direct foreign investment.

“We see many things in the same way as the US does,” Cecilia Malmström, the European Trade Commissioner, told the German magazine and online news site Der Spiegel earlier this year.

“We are defending ourselves against state-subsidized companies buying up our most creative companies, we are fighting against intellectual property theft and for greater transparency. We are working closely with the US and Japan on this, for example when it comes to better monitoring Chinese investments in our countries,” she added.

Beijing has been warned. But is anyone listening?