Don’t be misled by the towering skyscrapers, Five Star hotels and modern cars that you see in Beijing and Shanghai. Doing business in China is just as difficult as always, and perhaps even more so.

In most industries, the local competitors are getting bigger, better and stronger and are giving their international rivals a run for their money. In industries like power, railway and telecoms that are dominated by a few large state-owned companies and where the Chinese government is investing heavily, the combination of state sponsored capitalism and private entrepreneurs with money and clout is delivering a fatal one-two punch to even the world’s largest companies.

Earlier this year, the CEO’s of Siemens and BASF, two of Germany’s largest corporations with deep experience in China, had an unusually frank discussion with Premier Wen Jiabao in the presence of visiting German Chancellor Angela Merkel. According to those present at the meeting, the CEOs told Premier Wen that foreign companies were being compelled to transfer valuable intellectual property in order to gain market access. They complained about the forced disclosure of know-how in order to do business in China and investment restrictions in certain sectors where foreign companies are required to form joint ventures with Chinese companies. One participant said the exchange of criticisms was “unusually candid” for a meeting like this, and bordered on being “confrontational.”

It’s of course one thing for China to set the rules in its own market. In order to participate, companies can decide whether or not China’s rules are too onerous. After all, China is investing heavily across a number of industries, especially those that relate to infrastructure, and the government has a vested interest in ensuring that the money is used most cost effectively. While international companies have the edge in technology, local companies can make products more cheaply than the Chinese factories of the international companies. That is one of the reasons why China wants the locals involved. And China can hardly be blamed for wanting to use the opportunity presented by its own economic development to develop its local industries and companies.

Taking these methods abroad, however, is another story all together, and that’s what China appears to be doing in many emerging markets around the world.

Over the weekend, The Financial Times reported that the German industry’s Committee on Eastern European Economic Relations, which represents five industry associations and 140 top companies had prepared a paper, warning that China seems driven by geopolitical rather than economic goals, with potentially dire consequences for the European Union. The committee called on Berlin to lobby Beijing and European countries to ensure China does not help its exporters more than other nations.

According to the Financial Times, the paper cites how:

• the state-owned China Overseas Engineering Group won a motorway project in Poland by undercutting the next-cheapest bid by a third;
• Chinese groups won a bid to build a €170m ($240m) bridge in Serbia due to a €145m loan at less than half the market rate from the Export-Import Bank of China.
• Kazakhstan is switching to refinancing its banks via Chinese counterparts.

“The financing terms for Chinese suppliers often betray a huge degree of state subsidy, say in the form of very low rates for long-term loans from the Exim Bank,” the paper quotes the German banking association as saying. In the paper, the committee says there is a “direct correlation” between Chinese banks’ risk assessments of potential foreign projects and “the strategic interests of the political leadership in Beijing.”

Is China overplaying its hand with its actions at home and in overseas markets? At a time when the rest of the world is still struggling with high unemployment and slow economies in home markets, and when China’s currency policy is already under fire, the country appears to be doing just that. We should expect to see retaliatory measures by other countries in response.

While these macro-economic and political trends are important, and may be vitally so for the likes of BASF and Siemens, what’s the average company supposed to do? Rather than becoming entangled in international political tug-of wars, most CEO’s I know just want to figure out how to expand the market for their products. Simply giving up on China because it’s too difficult isn’t the right answer for most.