Sir Keir Starmer has been warned that Britain is at risk of falling into a Chinese debt trap because of its dependence on borrowing from Beijing.
Senior economists and politicians have sounded the alarm over hundreds of billions of pounds in UK debt owned by overseas investors.
They fear that this reliance will allow China to meddle in British affairs and strong-arm the Government as it is caught in an ever-tighter vice of unaffordable spending and interest payments.
The warnings come after prosecutors claimed they dropped charges against two suspected Chinese spies after Labour refused to brand Beijing a security threat.
The Government will face fresh pressure over its stance on China on Monday, with the Conservatives threatening to force a debate in the Commons to force ministers to answer questions.
Tom Tugendhat, a former security minister, said he will use the occasion to accuse the Government of “selling out” to Beijing, while Alicia Kearns, who worked with one of the suspected spies, will ask who made the decision not to call China a threat.
Labour admitted on Sunday for the first time that Jonathan Powell, Sir Keir’s national security adviser, had advised on matters surrounding the spy case.
On Sunday night Kemi Badenoch, the Conservative leader, wrote to Sir Keir to demand “clarity and honesty” over the fiasco, saying: “It seems that you and your ministers have been too weak to stand up to Beijing on a crucial matter of national security.
“Your Government is now on its fourth different story about this scandal. It leaves a strong impression that your Government undermined Britain’s national security because you are too weak to do anything other than appease China.”
Britain is increasingly dependent on foreign investors for its £3tn national debt. About 30pc of UK borrowing is drawn overseas, including from sovereign lenders. That compares with under a fifth at the turn of the century.
However, the exact scale of Chinese involvement in the UK’s debt is unclear because the Treasury does not publish figures. The approach is in contrast to the US, which publishes a comprehensive list, which shows China pulling away from American debt as Donald Trump has ratcheted up trade hostilities.
The Telegraph revealed last week that the Treasury lobbied to suppress the publication of a government report into spying by Beijing earlier this year. The revelation has stoked concerns about Beijing’s economic clout.
Edward Yardeni, a veteran bond analyst who coined the term “bond vigilantes” for the way debt markets are able to change the policies of indebted states, warned that China could use its ownership of debt to manipulate the UK.
Mr Yardeni said: “The Chinese are presumably capable of using their ownership of UK bonds to make it clear that they’re not happy with the UK’s policies towards China.”
He highlighted examples where China has been accused of lending money to indebted countries to gain control of strategic assets when they cannot repay.
Mr Yardeni said: “We have, over the past couple of years, seen accusations that the Chinese are using their leverage over emerging economies that they’ve lent money to actually acquire ports and mines that they’ve helped to build.”
He pointed to Sri Lanka, which was forced to hand China a controlling stake in a major port after the country ran out of cash.
“A country is more vulnerable when you’ve got fiscal excesses,” he said.
Labour’s “growth mission” has prompted senior ministers including Rachel Reeves, the Chancellor, to court cash from Beijing. After years of tensions and falling investment under the Conservatives, Chinese direct investments in British businesses and projects, which stood at £3.7bn at the end of 2023, appear to be rebounding.
The warnings come after Beijing announced on Thursday that its approval was required for any company, anywhere in the world, to export products made using Chinese minerals or battery technology.
Luke de Pulford, the head of the Inter-Parliamentary Alliance on China, said it was a sign that the Chinese Communist Party intended to “weaponise the dependence of other countries”.
He added: “Despite repeated warnings, the government walked into the trap.”
Ms Kearns said: “If we don’t wake up and get serious, we will be totally dependent on China, and be subject to the direction of the Chinese commerce ministry.”
Such concerns have emerged after Britain’s borrowing costs recently hit a 27-year high, piling further pressure on Rachel Reeves as she seeks to balance the books ahead of next month’s Budget.
Many in the City of London are wary of publicly criticising China following the suspension in 2019 of Paul Donovan, a UBS economist, for making comments about swine fever in China. His remarks prompted a backlash, with one Chinese firm suspending all business with the Swiss lender.
A leading UK-based economist said: “The current vulnerability of the UK’s fiscal position means the Government will be loath to do anything to upset the economic apple-cart, even if it means appeasing potentially hostile foreign actors.”
On Friday, a Chinese company announced plans to build Britain’s biggest offshore wind turbine factory in Scotland in an example of the investment at stake in any diplomatic clash with Beijing.
The £1.5bn facility proposed by Ming Yang will deliver a major boost to Ed Miliband, the Energy Secretary, as he seeks to show how Labour’s race to hit net zero targets can deliver dividends for workers.
However, the Ministry of Defence has previously raised concerns about the prospect of Chinese firms building wind farms for Britain, arguing that the turbines could be turned into spying sentries for Beijing – and provide a pretext for Chinese engineers to visit the country regularly.
The Telegraph revealed earlier this year that Chinese investment in Britain’s biggest public companies has surged to almost £90bn.
Both China’s central bank and its sovereign wealth fund now hold shares worth hundreds of millions of pounds in UK-listed defence firms including BAE Systems, which plays a significant role in the UK’s Trident nuclear deterrent, as well as engine-maker Rolls-Royce and Babcock, which helps to maintain Britain’s military tanks.
Labour has talked up the role of China in boosting the UK’s ailing finances, with the Chancellor hailing a £600m agreement with Beijing earlier this year as proof that “pragmatic cooperation” could “boost economic growth”.
But the Treasury is now facing fresh scrutiny over its role in the spy case following claims that officials were in “cahoots” with Mr Powell in the weeks before its collapse.
Christopher Cash, who worked for Tory MPs, and Christopher Berry, a teacher, were charged with passing intelligence to Beijing after being arrested in March 2023 before the case was dropped last month.
A source told the Sunday Times: “The accusation was clear that Jonathan Powell in cahoots with the Treasury had been driving through the decision.
“The explicit suggestion was that the case had to be dropped to appease China, otherwise there would be no further investment from Beijing.”
On Sunday, Bridget Phillipson, the Education Secretary, admitted that Mr Powell was advising Downing Street on issues around the spy case, but insisted he was not involved in discussions about the “substance or the evidence” before its collapse.
Mr Trump’s administration, which is engaged in its own trade war with Beijing, has criticised the British Government over the collapse of the spy case.
It also emerged at the weekend that the White House had warned Sir Keir against allowing a planned Chinese super-embassy to be built in London.
The Government is preparing to announce its long-awaited decision on whether to approve the vast new embassy near the Tower of London.
Officials in the Ministry of Housing, Communities and Local Government are preparing to announce that the Oct 21 deadline will be pushed back again after several delays amid opposition from critics over security concerns.
The Government was contacted for comment.