By Alistair Smout
(Reuters) -Prime Minister Rishi Sunak said he had raised his concern over any Chinese interference in Britain's parliamentary democracy during a meeting with Chinese Premier Li Qiang at a G20 summit in India, after the reported arrest of two alleged spies.
The Sunday Times reported that one of the people arrested on suspicion of spying for China was a researcher in the British parliament.
Sunak said he was limited in what he could say about an ongoing investigation but told reporters he had raised "his very strong concerns about any interference in our parliamentary democracy, which is obviously unacceptable", with Premier Li.
London's Metropolitan Police said two men were arrested in March under the Official Secrets Act, and had been released on police bail until early October.
The allegations potentially undermine Sunak's bid for more dialogue with China, illustrated by a visit by foreign minister James Cleverly to Beijing last week.
Sunak's Conservative government has sought a thaw in relations with China, engaging with Beijing on matters such as climate change but also criticising it in several areas including human rights.
Sunak said he raised areas where there are disagreements, but the meeting showed the value of the strategy of engaging "where it makes sense".
"I think the right thing to do was take the opportunity to engage, to raise concerns specifically, rather than just shouting from the sidelines," he said.
A Chinese readout from the meeting did not mention the spying allegation but welcomed Britain's expanded practical cooperation with China, adding Li had said that "the two sides should properly handle their differences".
However, the Chinese embassy in the UK responded to the arrests, saying the allegations were made up and that China firmly opposed them.
"The so-called claim that China is suspected of 'stealing British intelligence' is completely fabricated and malicious slander," the embassy said on its website, urging relevant parties to stop anti-China political manipulation and "self-directed political farce".
Iain Duncan Smith, Conservative lawmaker and China critic, said Beijing's attitude seriously questioned Sunak's approach.
"I don't think it's a dialogue. I think it's a kind of pathetic monologue," Duncan Smith, who has been sanctioned by China, told Times Radio. "What's actually going on is China is ignoring much of what we say."
(Reporting by Alistair Smout in London, additional reporting by Yew Lun Tian and Liz Lee in Beijing; editing by Hugh Lawson and Mark Heinrich)