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.

The report by the European Chamber of Commerce stated that there are “disturbing signs” that China is turning inwards. This trend is casting doubts on the country’s ability to grow.

Joerg Wuttke, Chamber President, stated that the reasons are a desire to exert political control over China and “fear of instability”.

China is trying to reduce its dependency on technology and overseas markets in order to develop its long-term economy. This shift was caused by the deepening divide with the United States in what’s known as a “dual-circulation strategy”.

According to the report, continued support of state-owned enterprises, “unsettling” national security concerns over economic policy, as well as efforts to control the private sector more effectively, will slow down innovation and efficiency.

Although the effects of this approach will not become evident for many years, it is important to not overlook them.

China will have to abandon the spirit of 1970s reforms, which opened up China’s economy and sparked decades of rapid economic growth. This would lead to less foreign investment and misallocations of resources, as well as a growing backlash abroad.

Wuttke said that China runs the risk to punch below its weight.

‘MARKET EXIT’

China’s policymakers have stressed the country will continue to open up and welcomes foreign firms.

Some foreign companies are supported, including those from the chemicals industry, but others are discouraged.

Some foreign suppliers to network equipment and services told the Chamber that market exit was inevitable due to the increased scrutiny from the national security perspective. Wuttke said that suppliers of medical equipment are often unable to sell because hospitals want to “buy Chinese”.

China was also asked to relax tit-fortat sanctions on Europeans, which are preventing the ratification a crucial investment agreement with EU.

Chinese officials were subject to sanctions by the bloc over alleged abuses of human rights in Xinjiang’s western region. Beijing replied with sanctions targeting European politicians and others.

European Commission, which is the bloc’s executive arm and has revealed plans in May to decrease dependence on Chinese or other foreign suppliers in six areas.

Wuttke stated that China is a major market for foreign companies, which contributes to large amounts of its tax revenues, trade, and employment. China was also a crucial market during the COVID-19 epidemic.

He stated that “in most cases…the China Operations are those who stabilize headquarters and basically bring about business to group.”