Angela Rayner, the deputy prime minister and housing secretary, faces a politically fraught decision over whether to approve plans for a new Chinese embassy at Royal Mint Court.

The Chinese government has resisted UK requests to carry out a major reconstruction of the British embassy in Beijing for at least a year on the basis that its own proposals in east London had been blocked.

Three UK sources with knowledge of the negotiations said the embassy had become a top issue for China in its relations with Britain.

London council rejects new Chinese embassy amid residents’ safety fears

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China wants to build a giant complex on 20,000 sq metres of land at Royal Mint Court, a historic site near the Tower of London that it bought six years ago. Tower Hamlets council refused planning permission for the embassy in 2022, citing security concerns and opposition from residents.

By calling in the decision last month, Rayner took it out of the council’s hands, though she has ordered a local inquiry into the matter.

“Until that one gets moving the British embassy in Beijing won’t move,” one source who was involved in the discussions under the Conservatives said. “The grounds for turning it down were pretty spurious … It came about more because they were so angry that [planning permission for the Chinese embassy in London] was just turned down without any support.”

Another source said of the Chinese government’s thinking: “They see it as a reciprocal-type thing where both people want changes, but our system doesn’t really work quite as centrally as theirs does.”

Half a dozen people who have visited or worked in the British embassy in Beijing in the past two years told the Guardian it was in a dire state and in need of major reconstruction. An official who visited the embassy for meetings in the past year said the issue would “come up at every single meeting”.

In a sign that the UK government is hopeful of finding a resolution to the matter, the Foreign, Commonwealth and Development Office (FCDO) submitted a procurement notice in August setting out plans to demolish the embassy in Beijing and rebuild it. The work is estimated to cost about £100m and is subject to local planning permission.

The Chinese government bought the Royal Mint Court site for £255m in 2018 as part of a plan to relocate its embassy from Portland Place near Regent’s Park, where it is housed in a townhouse that has become a target for Uyghur and Tibetan protesters.

After Tower Hamlets declined planning permission and the London mayor, Sadiq Khan, chose not to intervene, China refused to appeal and made it clear to Conservative ministers it wanted them to step in and give assurances they would back a resubmitted applicatio