MI5 also believes China is setting up "honeytraps" in an attempt to blackmail compromised executives into betraying commercial secrets, the newspaper said.
It alleges that a leaked MI5 document describes how undercover Chinese intelligence officers have approached British businessmen at trade fairs with the offer of "gifts" and "lavish hospitality".
The gifts, such as cameras and memory sticks, have been found to contain electronic 'Trojan' bugs which allow Chinese intelligence services remote access to any computer they are connected to, the newspaper said.
MI5 also accuses China of employing electronic hacking to obtain sensitive commercial information and believes the Chinese government "represents one of the most significant espionage threats to the UK", the report adds.
"Chinese intelligence services have also been known to exploit vulnerabilities such as sexual relationships and illegal activities to pressurise individuals to co-operate with them," the 14-page MI5 document says, according to the newspaper.
China has repeatedly denied spying on Britain. The newspaper said China's London embassy did not comment on the allegations.
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