The UK’s approach to a “whole of state” assault by the Chinese government on its economy, politics, civil infrastructure and academia is completely inadequate, an influential parliamentary committee has found.

China’s state institutions were aggressively targeting the UK, the all-party intelligence and security committee (ISC) said, and “without swift and decisive action” a nightmare scenario could emerge where China represented not just a commercial challenge but an existential threat to liberal democratic systems.

The committee, which completed its inquiry into the Chinese threat in May, was scathing about the failure of the UK to wake up to the scale of the challenge.

“We found that the level of resource dedicated to tackling the threat posed by China’s ‘whole of state’ approach has been completely inadequate, and the slow speed at which strategies and policies are developed and implemented leaves a lot to be desired,” the ISC said.

Until recently the UK government was willing to accept Chinese money with few questions asked, the ISC said, and “as a consequence the UK is now playing catch-up and the whole of government has its work cut out to understand and counter the threat from China”.

The failure to respond to the economic threat posed by China, and to put in place a way of protecting UK assets “is a serious failure and one that the UK may feel the consequences of for years to come”, the parliamentarians found.

The committee said: “There is no evidence that Whitehall policy departments have the necessary resources, expertise or knowledge of the threat to counter China’s approach.”

The government’s focus, the report said, was still dominated by short-term or acute threats. “It has consistently failed to think long-term unlike China, which historically has been able to take advantage of this.”

In a scathing assessment of British academia’s willingness to accept Chinese research grants, the report said, that “while some have expressed concern others seem willing to turn a blind eye, happy simply to take the money”.

“Academia is an easy option when it comes to the theft of intellectual property, with China taking advantage of collaborative projects to steal information which may be less protected,” it said, adding: “It is alarming there is still no single list of the areas of sensitive UK research which needs protecting.”

Finding that the west was generally too reliant on Chinese technology, the report said that “without swift and decisive action we are on a trajectory for a nightmare scenario where China steals blueprints, sets standards and builds products, exerting political and economic influence at every step. This presents a serious commercial challenge but also has the potential to pose an existential threat to liberal democratic systems.”

The committee also said that allowing China to invest in the UK’s civil nuclear programme was in effect ceding control to the Chinese Communist party.

Ministers have been adopting a less confrontational approach to China, insisting engagement is necessary if major problems such as the climate crisis are to be jointly addressed.

In response to the report, Rishi Sunak said China posed an epoch-defining challenge to the international order. “The government has already taken actions that are in line with many of the committee’s recommendations,” the prime minister said.

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Julian Lewis, the chair of the committee, said he found the government response to its work had been defensive and that the committee had remained in continual dialogue with the intelligence agencies after the formal end of evidence-taking. He claimed that overall the government response was “a reiteration of precisely the sort of policy that we are saying does not take security seriously”.

He accused the government of having “a record of resistance to allowing this committee to exercise proper oversight”.

The Chinese embassy in London did not respond to a request for comment.

The report was published as Germany released its first comprehensive strategy on Thursday on how Europe’s largest economy should deal with China. Drawn up by the cabinet of Olaf Scholz, the strategy would give the current and future governments a “compass for our relationships”, Annalena Baerbock, the foreign minister, tweeted. “We need China, but China also needs Europe.”

Baerbock acknowledged that Germany needed to cooperate with China on an economic level, but it had to reduce the dangers of being too dependent on a single country. “We don’t want to disconnect from China, but to reduce our risks,” she said. The more diverse Germany’s trade and supply chains were, “the more resilient our country will be”.

The strategy paper described China as Germany’s “partner, competitor and systemic rival”. It said the government’s aim was to ensure that dependencies in “critical areas”, such as medicine, energy provision and security, were reduced to a minimum “in order to reduce the emanating risks”.

Additional reporting by Kate Connolly in Berlin