By Carlos Tejada 

BEIJING--China is calling for U.S. technology companies to turn over sensitive material and submit to intrusive inspections, according to U.S. business groups, which are calling on Beijing to postpone the plan and come to the negotiating table.

In a letter dated Wednesday and addressed to Chinese cybersecurity officials, the U.S. groups said that the new rules involve turning over sensitive intellectual property, such as source codes, to the Chinese government. The products most also undergo "intrusive security testing" and would be required to use Chinese encryption algorithms. The rules would also restrict cross-border flows of commercial data.

Stricter cybersecurity standards could limit the range of U.S. products that would be available to Chinese businesses, it said.

The letter said the rules were recently proposed for the Chinese banking sector, but the groups worry they could be expanded to other sectors.

"An overly broad, opaque, discriminatory approach to cybersecurity policy" would isolate Chinese companies and worsen cybersecurity issues, it said. It called for China to further discuss potential new rules.

The letter was signed by the U.S. Chamber of Commerce, the American Chamber of Commerce in China, the Information Technology Industry Council and the Telecommunications Industry Association, among others.

Officials at the Cyberspace Administration of China didn't respond to requests for comment.

The letter comes at a time of escalating tension between the U.S. and China over cybersecurity issues, fueled by mutual suspicion on both sides, especially in the wake of disclosures of U.S. cyberspying efforts by former U.S. contractor Edward Snowden. In a conference call this week, Microsoft Corp. Chief Executive Satya Nadella said its operations in China fell short of expectations and cited "geopolitical issues," without elaborating. Experts have said cybersecurity concerns have hurt results in China for Cisco Systems Inc., International Business Machines Corp. and others.

"The Snowden snowball keeps getting bigger," said Duncan Clark, chairman of investment advisory firm BDA China.

Shortly after the allegations became public, state media sounded warnings about American "guardian warriors"--U.S. tech companies like Google, Microsoft, chip maker Qualcomm and computer networking giant Cisco Systems--having infiltrated China.

Several of the companies have since run into trouble in the country. Microsoft was subjected to an antitrust investigation, Google has seen virtually all of its products blocked, and Qualcomm has said it faces "significant challenges" in China, including an antitrust investigation of its own. In July, China's state broadcaster China Central Television called the location-tracking function on Apple Inc.'s iPhone a "national security concern."

Microsoft and Qualcomm have both said that they are cooperating with the investigations and don't believe they violated Chinese laws. Google has said problems with accessing its products in China exist on the Chinese side. Apple, which saw its revenue for the greater China area including Hong Kong and Taiwan grow 70% year-over-year in the most recent quarter, has said it doesn't track iPhone users or share their locations.

Washington has repeatedly accused Chinese hackers of stealing data from U.S. companies and has blocked efforts of Chinese telecom equipment makers Huawei Technologies Co. and ZTE Corp. to expand their business in U.S., citing national security concerns. In May, the Justice Department indicted five Chinese military officers on charges of hacking U.S. companies' computers to steal trade data--the first time the U.S. government publicly accused employees of a foreign state of cybercrimes against American firms.

Huawei and ZTE have both denied that their equipment poses security risks to the U.S. China's foreign ministry has dismissed the Justice Department indictments as being based on "fabricated facts."

Cybersecurity has come up often in meetings between U.S. and Chinese officials, including when Barack Obama met Chinese President Xi Jinping in Beijing in November, but U.S. officials say privately that little progress has been made. A U.S.-China working group on cyber issues that was dissolved following the Snowden disclosures has yet to be restarted.

China's proposed rules for the banking sector could constrict access to a major market for U.S. makers of IT equipment and custom software. At the same time, it isn't clear how banks would replace foreign technology if manufacturers refused to submit to the security checks.

The core functions of China's banking sector largely run on foreign-made servers and other equipment, according to Chinese banking executives. "Even though we have the will to replace the foreign brands with domestic ones, we just can't find any homemade ones that could be as reliable and secure as the foreign brands," said one of the executives, who works at a big state-owned bank in Beijing.

Since last year, Chinese banks have been accelerating their plans to upgrade the kind of banking cards used in the country. A key component of the plan involves replacing magnetic stripe cards with smart cards to enhance security. Again, according to the banking executives, chips made by foreign technology companies, like Samsung Electronics Co., are dominating the transition.

Wednesday's letter was addressed to the Chinese Communist Party's central leading group for cyberspace affairs, which is led by President Xi Jinping.

The letter was reported earlier Wednesday by the New York Times.

Write to Carlos Tejada at carlos.tejada@wsj.com

Corrections & Amplifications

U.S. business groups are asking China to postpone a new cybersecurity review process in a letter dated Wednesday. An earlier version of this article incorrectly said the letter was dated Tuesday.

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