"Beijing should in its own interests further open its domestic market and properly implement its long-announced economic reforms," BDI President Dieter Kempf said.
The paper, first reported by Reuters in October,called for the EU to create a stronger economic framework for its own internal market to bind firms from non-market economies to its own liberal economic system.
"For the EU, it is more important than ever not only to spell out the importance of its own system and values internally but also to offensively represent them externally," said the BDI.
Among its demands are toughening up EU subsidy rules. Companies that don't produce goods in the EU should not be able to receive state subsidies, it argued. It also called for more EU investment in infrastructure and innovation.
As Germany's main business lobby group, the BDI's views carry weight and feed into government policy decisions.
Bilateral trade between Germany and China hit a record 187 billion euros in 2017, almost 30 percent of the total EU trade with the Asian giant. Some of the country's biggest companies, including Volkswagen VOWG_p.DE and BMW BMWG.DE , rely heavily on the rapidly-growing market.
Entitled "Partner and Systemic Competitor - How to cope with China's state-driven economic model", the BDI paper stresses that China remains an important market.
"Nonetheless, it is generally sensible for the German industry to maintain diversified trade relations and make investment decisions," it said.
"Too much dependence on a single market always involves political and economic risks that must be minimized."
However, not everyone agrees that taking a tougher stance against China is the best strategy.
Germany's DIHK Chambers of Industry and Commerce, which estimates that some 900,000 jobs in Germany depend on exports to China, cautioned against more confrontation.
"The BDI position paper on China brings another tone into the debate," DIHK economist Volker Treier said. "But we always have to keep in mind that China is our most important trading partner. So every word should be weighed carefully."
Those close ties were illustrated by Volkswagen's plan to invest billions of dollars in electric vehicle technology over the next few years, part of a $300 billion surge by global automakers with nearly half of the money targeted at China. urn:newsml:reuters.com:*:nL1N1Z90MI
"The future of Volkswagen will be decided in the Chinese market," said Herbert Diess, chief executive of VW, which has decades-old joint ventures with two of China's largest automakers.
(Reporting by Michael Nienaber Writing by Madeline Chambers; Editing by Toby Chopra) ((Madeline.Chambers@thomsonreuters.com; +493028885230; Reuters Messaging: firstname.lastname@example.org))