Ten years after joining the World Trade Organisation, China has clearly gained—it is now the world’s second-biggest economy—but foreign multinationals and Chinese reformers alike worry that the drive to open its markets has stalled.

Rather than building on its WTO commitments to open new sectors, the focus has shifted to regulations designed to protect domestic state-owned champions, the critics argue.

That complaint has taken on new urgency given the darkening clouds over the European and U.S. economies. Both multinationals and China’s mostly private export firms will now have to rely on the Chinese market for growth.

“This problem (of favoring the state sector at the expense of private businesses) still has not been resolved, and that could lead to real problems as China’s market and economy develop,” Long Yongtu, the lead negotiator in China’s WTO entry, told a recent conference.

China’s ability to reform against a backdrop of Europe’s crisis and slower growth at home will be a focus of discussion at the Reuters China Investment Summit on Nov. 14-16.

Despite significant gains for multinationals in China’s consumer products sector, service sectors ranging from financial to legal to oil distribution remain largely closed to foreigners.

“There is not as much progress as people hoped,” said Michael Spencer, Asia Pacific economist for Deutsche Bank.

“In the financial sectors, I think there are countries that will argue China has been slowing its opening up.”

Loosening the grip of the state-owned sector might benefit not just foreigners, but China’s own vital private sector, which remains the biggest creator of jobs and gross domestic product growth.

Powerful State Sector

Those who, like Long, favor more economic openness face much of the same opposition that surfaced when China was negotiating its way into the WTO in the 1990s—powerful interest groups fear the state sector can’t compete.

Those interest groups argue that opening more sectors and evening the playing field for foreigners and private firms would trigger bankruptcies and job losses that China can’t afford. It would also deny the state valuable policy leverage.

Many government officials feel that ground given to foreign companies is ground lost for local constituents, said Zhang Hanlin, president of the China Institute for WTO Studies at the University of International Business and Economics in Beijing.

“In fact, there are two problems - how to cut the pie, and the fact that the pie is not big enough.”

He believes allowing competition would spur growth, especially in inland China, making it less necessary to hive out a protected sphere for local champions.

Any impetus for reform will be complicated by the expected hand-over of the top leadership in 2012, which will be accompanied by a reshuffle of senior government and corporate posts throughout the country. In such a climate, no bureaucrat is likely to support any agenda that might rock the boat.

Fear of Competition

Walk into any Chinese shop and the pre-WTO fear that Chinese manufacturing would be swamped by foreign competition seems groundless. China is now manufacturing for the world and whole industries have disappeared in the United States and Europe.

But a Chinese planner would notice that many of the made-in-China products on the shelves are in fact foreign brands, leaving hyper-competitive Chinese manufacturers unable to market their own labels or capture the fatter profit margins of the West.

China’s state sector was the loser when China first enacted conditions for WTO entry. After dominating the economy well into the 1990s, by 2009 its share of economic output had fallen to 30-40 percent, according to economic consultancy Dragonomics.

Since the global financial crisis began, the state sector has clawed its way back in a process known in China as “the state advances, the private retreats.” That too has raised alarms among those who believe the private sector creates more jobs and wealth for individual Chinese.