Britain needs a more robust strategy to block potential Chinese industrial espionage, MPs have been told.
Taking evidence from a panel of experts, MPs on the Defence Sub-Committee heard Beijing is actively seeking ways to infiltrate UK defence.
One way in which China is attempting to obtain military technology is through buying into supply chain firms, which poses grave security risks, according to the panel.
Elisabeth Braw, visiting fellow at the American Enterprise Institute, said: "Innovation in China is not as good as innovation here [in the UK], and so, where it concerns us, is when Chinese companies start investing in our companies to get access to our innovations, be they for civil and military use and for China’s benefit and to our detriment."
The UK has one of the largest defence manufacturing industries in the world and produces components for some of the most cutting-edge military machines across the world.
It is also one of the only major Western economies to not have specific legislation to regulate foreign investment.
China's President Xi Jinping has increased defence spending by 6.6% this year, with Beijing developing technology such as stealth jets and aircraft carriers.
MPs were told the fact a lot of China’s technology looks remarkably similar to western hardware is probably not a coincidence.
In a statement, the Ministry of Defence (MOD) said: "As an open economy, we welcome foreign trade and investment that supports UK growth and jobs.
"All companies must meet stringent requirements and we will not accept investment that compromises our national security, and this will be reinforced through the proposed National Security and Investment Bill."
Panel member, Defence Analysis editor Francis Tusa, said: "The Chinese, and before them, the Russians, the Soviets, are not stupid enough to try and put in a bid to buy BAE Systems or Rolls Royce.
"They know that every single alarm would go off.
"If you’re going to get an advantage – strategic advantage, industrially, technologically, you go, not just one tier down, probably two or three tiers down.
"It's precisely the area every Government department, Ministry of Defence, BAEs... goes 'well, we haven’t got the resources to check any of this' and that's precisely why it is such an easy way to get in.”
Michael Formosa, managing partner of Renaissance Strategic Advisors, added: "We need our partners to trust our supply chain.
"To be a serious partner, we need to ensure that our house is in order."
Twelve business takeovers have been reviewed on national security grounds since 2003.
If the National Security and Investment Bill becomes law –as expected – the Government predicts that number could rise, possibly to as many as 2,000.