China's tech business environment is deteriorating, with foreign investment increasingly directed at compliance and supply chain continuity rather than innovation, lobby group EU Chamber of Commerce in China has warned.

It says companies are weighed down by a slew of security-related regulations and cyber security rules so vague that they may hold back economic growth.

In its annual China position paper, issued Wednesday, the chamber said the risks of investing in China's "increasingly challenging business environment" were beginning to outweigh the returns.

National security considerations were "being balanced against – and sometimes taking precedence over – economic growth," it said.

For two-thirds of its members, profit margins were equal to or below the global average "and pessimism about future profitability is at an all-time high."

Despite positive signals that Beijing authorities might tackle some of the problems faced by foreign firms, limited or no progress has been made in the past 12 months.

The paper echoes concerns from the American Chamber of Commerce and contrasts with the official claims that China is committed to reform and tighter integration into the global economy.

'Increasingly defensive'

In telecom, the chamber said it was "disappointed" at the limited scope of recent reforms of the ISP and data center sectors, and once again called for the opening up of value-added services to foreign players.

It also repeated its call for harmonization with global standards and for limits to be placed on mandatory product certification.

The paper said foreign investment into China had shifted from being driven by cost or efficiency to compliance and supply chain resilience.

"New investments are increasingly defensive, geared towards creating China-specific value chains, separate IT and data storage systems for China due to regulatory requirements, localizing business functions, and enhancing compliance capacity, rather than beefing up China research and development or capturing market share," it said.

"These kinds of investments will neither create new jobs in China nor drive innovation."

It said the revision of cross-border data transfer regulations had been one area of progress, but it was still yet to define key concepts such as "important data" and "sensitive personal information."

Further revisions would be needed to ensure that the new rules "ultimately facilitate rather than hinder business."

IPR enforcement, another long-running issue for foreign tech firms, continued to be constrained by practical challenges, and little progress has been made in solving industry-level problems.

"Investors are now confronted with the reality that the problems they are facing in the China market may be permanent features that require a substantial strategic rethink," the chamber said.

The annual surveys published by the EU and US chambers are among the most respected and detailed guides to the China business environment.

The EU chamber's members include Ericsson, Nokia, SAP, Deutsche Telekom and the local arms of US firms Amazon and Intel.