Britain's national security is potentially being put at risk by the involvement of Chinese firms in the UK's telecoms systems, MPs warned today.
In a highly critical report, the parliamentary Intelligence and Security Committee (ISC) warned that attempts by ministers to balance the need to encourage Chinese investment in the UK with security equipment had resulted in an "unacceptable" stalemate.
It highlighted the case of the Chinese telecoms giant Huawei, which signed a major contract in 2005 to supply equipment to BT and has since signed deals with other companies including O2, TalkTalk and EverythingEverywhere.
But despite concerns that China exploits vulnerabilities in the Huawei equipment to spy on the UK through the telecoms system, the ISC said ministers were not even informed about the BT deal until a year after it was signed.
The committee said staff from the GCHQ signals intelligence agency should take over the running of Huawei's cyber security evaluation centre - known as the Cell - which it has built in Banbury, Oxfordshire.
"The Government's duty to protect the safety and security of its citizens should not be compromised by fears of financial consequences, or lack of appropriate protocols," the report said.
"However, a lack of clarity around procedures, responsibility and powers means that national security issues have risked, and continue to risk, being overlooked."
The report said members were "shocked" that officials chose not to inform - let alone consult - ministers about Huawei's deal with BT.
The ISC expressed concern that the Cell was funded and staffed by Huawei - even though personnel were security-cleared in the UK - and called for the National Security Adviser to carry out a review "as a matter of urgency".
"A self-policing arrangement is highly unlikely either to provide, or seen to be providing, the required levels of security assistance," the report said.
"We therefore strongly recommend that the staff in the Cell are GCHQ employees. We believe that such a change is not only in both Huawei's and Government's interests, but it is in the national interest."
The Joint Intelligence Committee - the UK's senior intelligence body - also warned that in the event of a cyber attack it "would be very difficult to detect or prevent and could enable the Chinese to intercept covertly or disrupt traffic passing through Huawei supplied networks".
Huawei, which was founded by Ren Zhengfei, a former officer in the People's Liberation Army, has been the subject of national security concerns in a number of countries, including the United States and Australia.
The ISC said it was initially told the ministers had not been informed of the BT deal in 2005 because officials had concluded that they did not have the powers to block it.
However the Cabinet Office subsequently conceded that the powers were available but officials had assessed that "the potential trade, financial and diplomatic consequences of using them would be too significant".
The Cabinet Office said new governance structures and working practices had now been put in place to address the deal with the risks to the telecoms supply chain and the situation was being kept under close review.
A spokesman however also stressed the importance the Government attached to building good relations with China.
"Boosting trade and investment is a key part of the Government's plan for growth and we are working hard to develop our economic relationship with key trading partners, including China. HM Government values this important relationship with China," the spokesman said.
"Huawei itself, as well as actively supplying the UK telecoms sector, is making a significant investment in the UK economy and this is recognised by the fact that the company has been added to the Government's strategic relationship management programme earlier this year."
Chancellor George Osborne issued a statement pointedly stressing that his "personal priority" remained boosting trade links with China and welcoming the opening of a new office by Huawei in Reading.
"The message is simple - inward investment is critical to generating UK jobs and growth. It is a personal priority of mine to increase trade links between the UK and China and I cannot emphasise enough that the UK is open to Chinese investment," he said.