Speaking ahead of an EU-China summit, EU Trade Commissioner Karel De Gucht said the EU and China needed to build up mutual trust, and demanded transparency on Chinese state subsidies to industrial sectors, which EU firms say threaten their business.
European companies say they face extra red tape, intimidation and even raids on their operations in China if they complain.
"I am ... worried when I read that European companies fear retaliation in China," De Gucht said at conference with European business executives. "That is disconcerting and must be addressed; by us in our dialogue with China and, of course, by China itself."
Chinese and EU leaders -- including Chinese premier Wen Jiabao, European Commission President Jose Manuel Barroso and European Council President Herman Van Rompuy -- will meet in the Chinese city of Tianjin on Oct. 25.
Their talks will cover the financial crisis, the G20 summit in early November and a possible launch of negotiations for an EU-China investment treaty.
In a report on EU-China business relations published on Friday, lobby group BusinessEurope said the EU should "develop means to protect its companies and member states from Chinese pressure and intimidation".
The group said divisions between EU capitals -- on whether to prioritise access to China's lucrative markets, or to challenge Beijing to protect EU industry -- were weakening Europe's position in negotiations with China.
"Differences of opinion within the EU prevent it from elaborating a coherent strategy towards China," the group said.
BusinessEurope President Juergen Thumann called on De Gucht to take legal action against what Brussels considers to be illegal Chinese state subsidies that put EU companies at a disadvantage.
EU companies have largely shied away from making official complaints about subsidies that could result in trade barriers being imposed on Chinese goods, for fear that China might withdraw business licenses or burden them with red tape. Brussels should start investigations even in the absence of such complaints, BusinessEurope said.
China has denied offering illegal state aid, insisting that it gives subsidies to any company operating in China.
No Chinese government officials spoke at the conference. But Chong Dahai, a journalist for state news agency Xinhua, was invited to the event to present China's case.
He warned Europe not to challenge China's system of subsidies and state-owned enterprises, lest it undermine China's economic growth. "China in the past four years has been acting as a locomotive of economic growth in the world," he said.
De Gucht has said in the past that China subsidises "nearly everything". On Friday he struck a more conciliatory tone, saying that the EU and China would work together to address EU suspicions of illegal Chinese state aid.
"There is a need to build up mutual confidence in the area of subsidies, and it all starts with improved transparency on what is going on on the ground. We continue to encourage China to engage in a dialogue on subsidies," he said.
But he took a firmer line on recent demands by Chinese Premier Wen Jiabao that Europe recognise China as a market economy in return for China's backing as Europe battles its debt crisis.
China covets the so-called market economy status that would, under World Trade Organization (WTO) rules, make it harder for Europe to block Chinese imports, and has promised reforms that would allow the EU to grant it free-market status.
"It is very difficult to go in that direction," De Gucht said. "Legislation is also meant to be put into practice and that is not at the moment the case."
Investment Treaty
It was still unclear whether EU and Chinese leaders will announce the launch of negotiations for an investment treaty that would promote and protect growing investment flows in both directions, De Gucht said.
