BEIJING—European companies say operating in China is growing increasingly difficult as they battle loosely defined laws, perceived protectionism and industrial overcapacity.

The European Union Chamber of Commerce in China, a trade group representing over 1,600 European companies operating in the world’s second-largest economy, said in an annual business confidence survey that the environment is “increasingly hostile” toward foreign companies and “perpetually tilted” in favor of domestic players.

Pessimism among European companies operating in China reached an all-time high, it said, with 31% of respondents bearish about the profit outlook, up 8 percentage points compared with 2015 levels. And 70% said they felt significantly less welcome in China than in years past, up 7 percentage points over 2015. Particularly negative in their outlook: the machinery, information technology, telecommunications and chemical industries.

The results mirror the findings of an American Chamber of Commerce in China survey in January in which 77% of companies said they felt less welcome now than a year ago, compared with 47% in 2015 and 44% in 2014.

China’s commerce ministry didn’t respond to a request for comment on foreign companies’ perception that operating in China has become more difficult.

The European chamber said the difference in operating conditions is significant. “I see a sea change,” said  Jörg Wuttke, the chamber’s president. “Pessimism is basically far more pronounced.”

European companies surveyed said China has moved too slowly in cutting the number of factories currently producing more goods than buyers want. On Monday, U.S. officials urged China to reduce excess steel production they say is fueling trade tensions. “Excess capacity has a distorting and damaging effect on global markets,” U.S. Treasury Secretary  Jack Lew said in Beijing at the opening of a two-day dialogue between the U.S. and China.

Mats Harborn, executive director of Scania Sales China Co., an arm of the Swedish bus and truck maker and among the companies surveyed, said weak enforcement of vehicle-safety standards in China often favor local players in a position to bend the rules.

“Transportation is a good indicator of how China’s doing as a whole. They’ve made some progress but it’s far from enough,” Mr. Harborn said. “There’s massive overcapacity when it comes to transportation. It’s quite messy. We’d like to see proper enforcement so everyone follows the same rules and competes on service.”

While companies in the auto and food and beverage industries reported strong profit growth, the chamber reported, virtually all sectors have been hit by China’s weakening economy, which decelerated to 6.7% in the first quarter, its slowest pace since the global financial crisis. The expectation is that “the worst is yet to come,” the report said of China’s downturn.

Despite growing difficulties, however, over 85% of companies surveyed said they were still profitable or breaking even in China, reflecting an official growth rate that remains among the fastest of any major economy. “Even if China’s growing at a slower pace, it’s adding an Indonesia every year,” Mr. Harborn said.

European companies also expressed concern over restrictive internet policies, the slow pace of reform and weak enforcement of intellectual property rights at a time when China is eager to boost innovation and upgrade its economy.

“Many companies are hugely worried about involuntary technology transfer,” said  Michael Clauss, Germany’s ambassador to China. According to the survey, 72% of European companies were willing to invest in R&D in China last year, down from 85% in 2015.

Four in 10 companies in the survey also felt their companies faced discrimination through recently promulgated national-security-related legislation. Apple Inc. General Counsel Bruce Sewell told the U.S. Congress in April that China for the last two years has asked for its source code, a request the company said it refused.

Last week, more than two dozen American and international business groups signed a letter of protest against proposed Chinese regulations for the insurance sector that they say could result in discrimination against foreign technology companies.