Germany's powerful BDI industry association criticised China on Tuesday for passing a law to counter foreign sanctions, which it said sent a worrying signal to investors and companies abroad.
China is one of the most important export markets for German companies outside the European Union's single market, but concerns over human rights abuses and a crackdown in Hong Kong are putting a strain on political as well as economic ties.
Beijing passed a wide-ranging law last week to counter foreign sanctions, in an apparent move to legalise its tit-for-tat retaliation.
"Instead of relying on a de-escalation, the Chinese government is creating new uncertainties. This is damaging China's reputation as an investment location and trading partner," BDI board member Wolfgang Niedermark said.
The law was very different from similar laws in the EU as it undermined legal clarity and created a grey area which hung over any company doing business in China, he said.
Senior German government officials and business leaders are openly calling for a diversification of trade relations in Asia to become less dependent on China in the coming years.
The Chinese sanctions against members of the European Parliament and think tanks have already frozen the ratification of the EU-Chinese investment agreement, Niedermark said.
"Instead of reacting with threatening gestures, the Chinese government would be well advised to introduce more constructive elements into the dialogue with its trading partners," he said.
The new law, effective immediately, builds upon previous administrative counter-measures against foreign sanctions issued by the Chinese foreign and commerce ministries. It also lays out the scope of China's counter-sanctions.