The commission referred to recent Chinese attempts to buy US companies such as chipmakers Fairchild Semiconductor and Micron Technology, which have led to "growing political concerns" for US national security.
"There is an inherently high risk that whenever [a state-owned enterprise] acquires or gains effective control of a US company, it will use the technology, intelligence and market power it gains in the service of the Chinese state to the detriment of US national security," the commission reported.
The report was received badly in China, where Chinese officials have already complained about blocks to their investment in the US.
"The report has again revealed the commission's prejudices and stereotypes against China," Chinese Foreign Ministry spokesman Geng Shuang told a daily news conference in Beijing.
Alexander Larin of the Russian Academy of Sciences' (RAN) Institute of the Far East told Sputnik that relations between China and the US could become particularly strained if Congress follows the recommendation, particularly given that new US President Donald Trump has spoken out against Chinese economic policy and threatened to impose higher tariffs on Chinese goods.
"Following the election of the new US President, some forces have stirred which want to review economic relations with China," Larin said.
"Bringing this kind of recommendation to Congress demonstrates that Trump has a certain level of support in the business community, and that his eccentric statements during the election campaign had some basis, that he has some support."
China's US investments are increasing rapidly and last year, for the first time, Chinese companies invested more in the US than American companies did in China. In the first half of this year Chinese companies invested a record $18.4 billion, more than triple the amount invested in the first half of 2015.
Between January 2005 and June 2016 the US received over $125 billion in large Chinese investments, excluding bonds.
"Of course this is alarming for Beijing, they have already talked about the need for efforts to further the positive and constructive development of Chinese-US relations."
"A good basis for this could be Chinese ideas to develop a new kind of relations between China and the US, as major powers. The development of events shows that the alarm in Beijing about future relations was justified. It is absolutely possible that we will see a worsening of Chinese-American economic relations. I expect some serious and important events, although it is impossible to predict how far the US will go in straining trade relations with China," Larin said.
The decision to prevent Chinese state-owned corporations from investing in US companies may also impact China's ability to invest in Europe, too.
Last month the German government suddenly withdraw approval for a proposed Chinese takeover of semiconductor manufacturing equipment maker Aixtron, after a meeting with US intelligence, German newspaper Handelsblatt reported.
During a meeting at the US embassy in Berlin, US intelligence presented German government representatives with evidence that Aixtron manufacturing technology also has military applications, and convinced the Germans to stop the deal.