UPDATE 1-EU trade chief to seek investment pact with China
* Agreement would protect EU investors in China
* Could eventually pave the way for a free-trade deal
BRUSSELS, May 23 (Reuters) - The European Commission will seek the support of EU governments to launch talks with China on an investment pact that could be a precursor to a free-trade deal if Brussels and Beijing can overcome growing tensions.
EU trade chief Karel De Gucht said on Thursday he would ask the European Union's 27 countries to agree on a negotiating mandate for a deal with China that would reduce barriers to each other's markets and encourage new capital flows.
Documents seen by Reuters this week show that a much more ambitious free trade agreement could be considered after an investment pact - but only if China and the European Union can work out their differences.
"From the EU side, we want this investment agreement and we want to see this as a first step, and once this is successful we are ready to consider further options," said an EU official, who requested anonymity because of the sensitivity of the matter.
The European Union wants to deepen ties with China, its second-largest trading partner, to help it emerge from economic crisis. But the bloc is concerned by what it sees as China's state capitalism, accusing Beijing of flooding domestic industry with cheap credit to undercut European rivals.
Trade friction has increased since Brussels said this month it is preparing to levy prohibitive duties on billions of euros' worth of solar panels from China.
De Gucht also publicly accused Chinese telecoms companies Huawei and ZTE (000063.SZ) of dumping products in Europe and has threatened to launch an investigation that could lead to duties on the two companies' equipment.
Brussels says an investment agreement could provide security for Chinese investors in Europe, which would replace national bilateral investment treaties with one EU treaty.
"In terms of market access, Chinese firms aren't going to be gaining very much, but you have to recall that at this time there are a lot of questions being asked about Chinese investments in a number of countries," said the EU official.
China says solar panel duties would seriously harm trade ties, and Beijing is expected to decide in June whether to levy its own duties on imported European solar-grade polysilicon, a raw material used in solar panel production.
But De Gucht sees an potential investment pact with China as part of a wider strategy to force Beijing into line with international trade rules.
China has the most restrictive foreign investment regime in the Group of 20 major economies, according to the Organisation for Economic Co-operation and Development, and requires EU companies to share their know-how with Chinese firms.
"The agreement needs to secure existing openness and deliver new liberalization of the conditions for accessing each other's investment market," De Gucht said in a statement. "Crucially, it should improve the treatment of investors and their assets."
Chinese direct investment could bring more than $250 billion in fresh capital to Europe this decade, according to a 2012 study by New York-based research company Rhodium Group.
The European Union is the world's top destination for foreign direct investment, attracting 225 billion euros ($290 billion) from the rest of the world in 2011, European Commission figures show.
There was no precise timeline for talks on the agreement, but EU officials said they normally aim to conclude negotiations on such agreements within two or three years. A negotiating brief could come this year.
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