* Ruling says China's Xinanchem not controlled by Beijing
* EU-China trade relationship hampered by divisions
By Robin Emmott and Ethan Bilby
BRUSSELS, July 19 (Reuters) - The highest EU court has cleared a Chinese chemicals company of accusations that Beijing was controlling its trade with Europe, in a victory for private Chinese firms who say they are unfairly labelled as subsidised agents of the Chinese government.
The lower General Court in Luxembourg ruled in 2009 that China's Zhejiang Xinan Chemical Industrial Group was not guilty of dumping - selling for unrealistic prices - chemicals on European markets.
The EU Court of Justice (ECJ) said on Thursday it upheld that decision, turning down an appeal by the European Union's 27 countries.
At the heart of the court decision was its finding that the company, known as Xinanchem, was free from state interference in running its business - even though the Chinese state is a minority shareholder.
The ECJ stood by the General Court ruling that "the control exercised by the Chinese state, as a minority shareholder, over Xinanchem cannot be equated, automatically, to significant state interference", it said in a statement.
Efforts to deepen the relationship between the world's biggest trading partners have been hampered by disputes over what European companies say is unfair competition, accusing Chinese firms of benefiting from illegal government subsidies.
Smoothing those difficulties could propel a wave of Chinese direct investment of up to $500 billion in fresh capital to Europe this decade, economists say. EU trade with China is likely to reach a record of 500 billion euros ($625 billion) this year.
EU trade chief Karel De Gucht has accused China of state capitalism - close government control of privately owned business - and EU diplomats say he is considering action against China's top telecoms equipment makers, Huawei and ZTE Corp.
The European Commission thinks Huawei and ZTE receive illegal state subsidies to undercut rivals in Europe, diplomats say, an accusation the companies deny.
In similar pending cases, other Chinese firms have filed suits in EU courts to challenge punitive duties on goods ranging from shoes to ceramics.
Such penalty charges are imposed on goods Brussels says are being dumped and are damaging European industry.
Tariffs on Xinanchem's imports of glyphosate, a herbicidal chemical used in farming, were dropped when the General Court ruled in the company's favour in 2009.
A major issue for Beijing is that the European Union does not recognise China as a market economy, so its companies are more vulnerable to be found guilty of dumping goods.
But the court ruling could bring change, diplomats and analysts say.
"The Court of Justice's ruling reinforces the right for individual Chinese firms to get market economy treatment," said Fredrik Erixon, director of the European Centre for International Political Economy, a Brussels-based think-tank.
"Market economy status for China is an issue of big symbolism, one of the chief ambitions for China in its negotiations with Europe," he said.
China has repeatedly pressed the European Union to give it market economy status and argues that the role of Chinese state-owned enterprises in the world's second-largest economy has decreased significantly over the past decade.
State firms accounted for almost 60 percent of all fixed asset investment in China in 2004, but that number dropped to 36 percent last year, according to a study by the Hong Kong-based consultancy CLSA Asia-Pacific Markets.
Industrial output by state-run companies has also declined steadily from 80 percent of output in 1999 to 34 percent in 2011, the study showed.
"There is an impression in Europe and the United States that everything in China is run by the state and, while there are issues, it isn't really true," Erixon said. (Writing by Robin Emmott; Editing by Pravin Char)