I think what the West (in particular the Europeans, having experienced this) fears the most is something similar to what happened to them in the high-speed rail/train sector.
China, initially having no experience with high-speed rail bought sample systems from the 3 main suppliers - the French with the TGV, the Germans with the ICE and the Japanese Shinkansen.
Eager for further orders, they agreed to some transfer of technology and all three built high-speed lines in China.
All of them expected that large orders would follow, but much to their dismay, the integrated nature of China's rail and rolling-stock manufacture allowed them to learn quite a lot from those designs.
Now China can not only build competitive (if not better) products, but can even under-cut them in price.
CSR really surprised them all at the speed with which they learned how to make those high-speed trains - no one expected them to be able to do so as quickly as they did.
What if something similar happens with the weaponry they sell - a few samples here and there, a series of token orders, some transfer of technology, then voila! - a Chinese facsimile that may even perform better at an unbeatable price.
Truly a nightmare for the West.
I don't know what kind of sales they were really expecting, since they must have known, like we all do, that China wants the technology more than the product. But, how many systems did Shinkansen export to the world before this? I think the number is zero, and it's not too different for the the European companies. In the end, this technology ended up being for home use. Today, now that China has actually opened the field and begun exporting high speed rail, there is at least a chance for the Japanese and others to export, and they are bidding on various projects. I don't know if they foresaw this back then. But if your wonderful technology is not producing profits any more, why not sell it? I think this was the rationale behind the sale of AP1000 nuclear technology to China as well.
With military technology there is an added issue, which is that a state which wants to preserve or develop its option of being a power independently, needs to maintain a military industrial sector that basically cannot pay for itself, unless there are exports, or a war, or some major "modernization" going on.
Frankly, I don't know if this "added issue" argues in favor of selling or of not selling, but surely, the decisions can be taken on a case by case basis by the corporations and states involved. This would solve their diplomatic problem with China, and of course, it would create a new problem with the US, so we're back to square one.