The world's number two economy is straining under the pressure of a highly indebted property sector, sluggish domestic spending and high youth unemployment.
Among the top concerns for European firms is a manufacturing glut -- propelled by massive state subsidies -- in key sectors, which many Western governments have called harmful to competition.
Brussels has this year imposed hefty provisional tariffs on EVs imported from China, after an anti-subsidy probe found they were unfairly undermining European rivals.
"There is just such enormous waste right now in some of these sectors," Jens Eskelund, president of the European Union Chamber of Commerce in China, said at a news event Wednesday.
"Why would you go, as a European company, to increase investment when you are going to see mass death in these industries in the coming years?" he asked.
Eskelund added that he expected to see a major reduction in the number of Chinese EV brands in the coming years.
Friction between China and Western governments is also dampening the outlook, as concerns over a potential trade war mount.
In this light, the risks of doing business are "mounting and the rewards (are) seemingly decreasing", the Chamber said in a position paper Wednesday.
"Many investors are now confronted with the reality that the problems they are facing in the China market may be permanent features," said the Chamber, which drew on the views of the more than 1,700 EU firms operating in the country.
"A substantial strategic rethink" may now be required, it warned.
- Tipping point -
While China's economic malaise represents the top concern for its members in the country, other issues including a politicised environment and murky regulations are compounding the challenge, the report added.
"For a growing number of companies, a tipping point has been reached," Eskelund said.
Investors, he said, were "now scrutinising their China operations more closely as the challenges of doing business are beginning to outweigh the returns".
Beijing has said it is pushing for five percent economic growth this year -- a goal considered ambitious by many analysts.
July's "Third Plenum" political gathering in Beijing was closely watched by observers for signals of major economic policy changes.
But the Chamber's report said the outcomes of that meeting -- which did not see Beijing unveil any substantial new policies -- did little to allay the concerns of foreign firms.
Instead, it suggested that "a resurgence of the state sector, in line with China's more security-focused objective, may be prioritised over the private sector", the report said.
Recently amended laws on counter-espionage and foreign relations have also forced foreign firms to divert more resources into due diligence and compliance efforts, the Chamber said.
"This enhances the attractiveness of other markets that can provide more legal certainty," the report added.
"China still holds significant potential," Eskelund said.
But, he warned, "this situation urgently requires more action from the Chinese government, not more action plans".
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