A Whitehall battle for control of the UK’s China policy is under way between the Cabinet Office security directorate and the Foreign Office, a former senior diplomat has disclosed.

The disagreement, described by Simon McDonald as unresolved, will give ammunition to those who claim that the UK’s policy on China remains ambivalent despite the attempt to set out a balanced policy in the integrated foreign and security review published this week.

Speaking to the Lords international relations and defence committee, Lord McDonald said UK policy in 2010 was to view China “completely as an economic power and an economic possibility”, with no political implications, but this started to recalibrate in 2016 when Theresa May as prime minister highlighted security threats.

“The system is still grappling with how to organise policy overall in relation to China. There are two basic models and we have still not come down decisively in favour of one or the other, “ said McDonald, a former permanent secretary at the Foreign Office.

“One is to have a unit in the Cabinet Office national security directorate bringing everything in, and the other is to have the department which has most of the expertise, as the lead department, and for that department to have a unit pulling in necessary other expertise from other parts of Whitehall. That is something still to resolve.”

In seeking to own the UK’s China policy, he said, Foreign Office diplomats cite the example of the speed with which they assembled a policy towards Russia in the wake of Skripal poisoning by KGB agents in Salisbury in 2018.

Although Whitehall turf wars occur, it is rare for such uncertainty to cloud probably the biggest single foreign policy issue to face the UK, and it reflects a dispute between those who see China through a diplomatic or a security lens. A series of China experts including the former UK diplomat Prof Kerry Brown gave evidence to the same committee last month and argued that the UK did not have a China policy framework that balanced security risks with economic opportunity.

McDonald said the UK had been looking for a great leap forward in relations with China by providing financial services, but “frankly that has not happened and is not happening”. From his conversations with Chinese opposite numbers, he had come to the view that “China was not looking to British or western ways of organising their service sectors. They want to generate it as far as possible internally”.

But McDonald rejected suggestions that Britain should distance itself from China owing to its human rights record. “We are a trading country. China is the second largest economy in the world. I see no British prosperity without a trading relationship with China.”

Mark Sedwill, the former cabinet secretary, speaking to the same committee, said: “There are many countries in the world with appalling human rights records with which we have had an economic relationship over many decades, and that has been a traditional position of the UK.”

He said a sense of western cohesion against China had been sadly lacking, and this had allowed China “to pick off or seek to bully individual nations”. He said Australia, for instance, received little more than rhetorical support when it demanded China allow an independent inquiry into the start of the coronavirus outbreak in Wuhan.

“The absolute key to this is a sense of common purpose across the west,” Lord Sedwill said. “If we try to do it separately, China’s sheer weight and ruthless use of its power will seek to divide and rule and play different countries off each other.”