Members of Parliament on the Intelligence and Security Committee (ISC), Parliament’s intelligence watchdog, have said that China could be spying on British citizens and firms through its supply of broadband equipment to UK telecoms companies. MPs say they have serious concerns about the internet deals signed by BT and O2 with the Chinese telecoms firm Huawei.

A report delivered by the committee says that China could ‘intercept covertly or disrupt traffic passing through Huawei-supplied networks’ and adds that oversight of the firm in the UK is ‘feeble’ and suffers from the ‘absence of any strategy’.

Huawei is known to supply mobile handsets, routers and equipment in telephone exchanges and street cabinets to a string of British telecoms companies.

The scathing nature of the report led the Chancellor, George Osborne, to take the unusual step of issuing a statement in response to the ISCs findings, and has stressed the importance of Chinese investment in Britain.

Mr Osborne, clearly anticipating a diplomatic row, said:

… 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.

The MPs report even called for staff from the GCHQ listening agency to take over the running of Huawei’s cyber security evaluation centre which it built in Banbury, Oxfordshire.

Eight years ago, Huawei secured a contract with BT as part of the £2.5 billion super-fast broadband deal to supply two-thirds of British homes and companies by 2015. The Chinese firm has also signed deals with O2, TalkTalk and EverythingEverywhere.

National security concerns were sidelined in favour of money as the Chinese had managed to undercut local firms for the contracts.

Members of the ISC were ‘shocked’ that ministers were not even informed about the BT deal until a year after it was signed. Chairman of the committee, Sir Malcolm Rifkind, said:

… Such a sensitive decision with potentially damaging implications should have been handed to ministers. A lack of clarity around procedures, responsibility and power means that national security issues have risked, and continue to risk, being overlooked.

Ahead of the report’s publication, members of the committee had warned that it would be heavily censored because of the Treasury and Number 10’s fears of scaring away Chinese investors – claims which have been denied by Downing Street.

Relations with China have been strained since the Prime Minister, David Cameron, agreed to meet the Dalai Lama, Tibet’s spiritual leader, last year. Granting him an audience was seen by Beijing as a snub to China’s sovereignty over Tibet.

In its last annual report, the ISC said that a fifth of detected cyber-attacks against the UK were so sophisticated that they had to be state sponsored or part of an organised crime ring. China is often cited as one of the main perpetrators of state-sponsored cyber-attacks.

Huawei says it is ‘willing to work with all governments in a completely open and transparent manner to jointly reduce the risk of cyber security’.

In a statement issued by BT, the company says that security is at the heart of what it does and will continue to be so in the future. BT says that its testing regime enables the company to enjoy constructive relationships with many of its suppliers across the globe. BT has had dealings with Huawei since 2005.

WELCOMED BY BRITAIN, DAMNED BY U.S.

The mysterious Huawei company has repeatedly insisted that it has no connection to the Chinese state.

But claims persist that it has close links with the military and government, and could be helping to glean and gain information on foreign states and companies – accusations the firm strongly denies.

Despite security fears, the firm’s operations have largely been welcomed by the UK government.

It has had UK headquarters since 2001, and Huawei UK Enterprise Solutions – which currently has 650 employees in Britain – plans to double its workforce in the next few years. Last year, David Cameron welcomed its founder, Ren Zhengfei, a former officer of the People’s Liberation Army, to Downing Street.

At the time, the firm announced it planned to invest £1.3 billion in Britain, although it did not spell out any details.

While it has been welcomed in the UK, Huawei has had a frostier reception in America and Australia.

The Australian government prevented it from working on the country’s broadband network.

And a United States congressional intelligence committee report concluded that it posed a national security threat.