China's refusal to condemn ally Russia for its war in Ukraine also poses a "reputational risk" for the world's second-largest economy, Trade Commissioner Valdis Dombrovskis said in a speech at Beijing's Tsinghua University.
He said transparency and openness were "a winning strategy in the long run", at a time when trade tensions between the European bloc and China are mounting.
"China is navigating a challenging transition from an investment-led economy to a broad-based economy," he said.
"For this it needs to remain open."
Dombrovskis's four-day trip, which kicked off Saturday, follows a report by the EU Chamber of Commerce that showed business confidence was at one of its lowest levels in years.
It also follows Brussels' decision to launch a probe into Beijing's electric car subsidies.
The investigation could see the EU try to protect European carmakers by imposing punitive tariffs on vehicles it believes are unfairly sold at a lower price.
China's commerce ministry has condemned the EU's "naked protectionism", and said the measures "will have a negative impact on China-EU economic and trade relations".
On Monday, Dombrovskis insisted China remained an attractive investment opportunity for European businesses.
"The EU and China both benefited immensely from being open to the world," he said, adding that "European companies still want to invest here -- but only if the conditions are right."
- From 'win-win' to 'lose-lose' -
Growing challenges for European business in China mean that "what many saw as a 'win-win' relationship in past decades could become a 'lose-lose' dynamic in the coming years", the commissioner said.
A new foreign relations law aimed, in part, at combating foreign sanctions and a recent update to China's tough anti-espionage regulations are of "great concern to our business community", Dombrovskis said.
"Their ambiguity allows too much room for interpretation," he warned.
"This means European companies struggle to understand their compliance obligations: a factor that significantly decreases business confidence and deters new investments in China."
He also criticised China's refusal to condemn Russia's war in Ukraine, which he said "is affecting the country's image, not only with European consumers, but also businesses".
China has sought to position itself as a neutral party in the Ukraine conflict, while offering Moscow a vital diplomatic and financial lifeline as its international isolation deepens.
Chinese President Xi Jinping visited Moscow in March, while Russian leader Vladimir Putin is due to visit China next month.
"Territorial integrity has always been a key principle for China in international diplomacy. Russia's war is a blatant breach of this principle," Dombrovskis said.
"So it's very difficult for us to understand China's stance on Russia's war against Ukraine, as it breaches China's own fundamental principles."
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