By Joe Cash

BEIJING A slowdown in both the Chinese and global economies is the biggest issue affecting European firms in China, beating political tensions with the United States and decoupling, according to the European Chamber of Commerce in China.

The number of European firms that see China as a top-three destination for future investment was at its lowest total on record, the chamber's annual position paper released on Wednesday said. The EUCCC has recorded this figure since 2010.

As rising interest rates and inflation squeeze demand in Europe and the United States, companies in China are in contrast battling a sharp decline in prices as the risk of deflation weighs on the world's second-largest economy.

The number of European companies reporting their China-sourced revenues had decreased in 2022 was three times higher than in 2021, the report said, while the importance of China to companies' global profits fell for a second consecutive year.

"The deterioration of business sentiment that has taken place over the last three years has been significant and cannot be reversed over night," the chamber said.

BASF, Maersk, Siemens, and Volkswagen are among the members of the chamber.

The chamber's findings, which were based on the views of members from February to early March, revealed that a record number of companies had lost business last year due to market access and regulatory barriers.

President Xi Jinping's increasing focus on national security - in particular a recent crackdown on consultancies and due diligence firms - has left many foreign companies uncertain about where the line is in a market where regulations can often be vaguely worded.

"With new and forthcoming European and U.S. legislation set to compel many companies to demonstrate greater transparency in their China operations, the trend of supply chain diversification and divestment is likely to strengthen in the medium-term," the chamber said.

Foreign direct investment (FDI) into China has slowed substantially since the country abandoned its strict COVID-19 curbs late last year, with dollar-denominated FDI down 5.7% in January-May compared with the same period last year.

The EU's trade deficit with China widened in 2022 to reach 396 billion euros ($433 billion), leading European Commission President Ursula von der Leyen to call on the bloc to "de-risk" economically and diplomatically from China.

(Reporting by Joe Cash; Editing by Angus MacSwan)