It was this year’s aborted takeover of an obscure Italian company with little more than 50 employees that illustrated just how far one of China’s biggest diplomatic successes in Europe had unravelled.

In 2019, Rome stunned its US and European allies when Italy’s then populist coalition government became the first G7 member to sign up to China’s Belt and Road Initiative. Signed during a state visit by Chinese president Xi Jinping, the agreement propelled Italy to the frontline of Beijing’s battle for global power and influence.

But then, two years later, Italy’s newly appointed prime minister Mario Draghi quietly signed a decree that symbolically ended China’s Italian courtship and contained Beijing’s beachhead in western Europe.

Italy’s last government had already begun to cool on Chinese investment amid significant US pressure. Even so, Draghi’s move marked a decisive Italian shift towards a foreign policy he has described as “strongly pro-European and Atlanticist, in line with Italy’s historical anchors”.

It also presaged a broader EU rethink of Chinese relations that, most recently, has led to the European parliament freezing its pending trade deal with Beijing.

“To make it look like Italy is aligned with the US, sometimes you need to do little things to prove it,” said Michele Geraci, a China expert who, as undersecretary for economic development, was one of the architects of Italy’s Belt and Road agreement with Beijing.

It was “a political statement to show we are worried about predatory acquisitions, and that we are aligned with our American friends”, Geraci added. Italy’s participation in China’s BRI remains technically in force but has been rendered essentially meaningless and no major deals have taken place. The Sino-Italian unravelling began in December, two months before Draghi was appointed prime minister. Shenzhen Investment Holdings, a partially state-owned Chinese company, struck a deal to buy a 70 per cent stake in LPE, a privately held Milan-based company that makes semiconductor equipment. But in March, with the Draghi government now in place, the decision to grant permission for the takeover landed, as a matter of routine, on the desk of Italy’s new minister for economic development, Giancarlo Giorgetti.A veteran lawmaker from the rightwing League party, Giorgetti proposed invoking Italy’s so-called Golden Power laws to block foreign takeovers. Draghi signed the decree blocking LPE’s sale at a cabinet meeting on March 31, citing a shortage of semiconductors, which made LPE part of a “strategic sector”.

LPE, which produces components for power electronics applications that are also used “in [the] military field”, as the decree described it, declined to comment. Shenzhen Investment Holdings has said it will continue to co-operate with LPE in certain areas.

Draghi’s decision was a watershed for Italy and, Italian diplomats say, perhaps also for the EU.

Only a few years ago, Italian politicians had enthused about how Chinese money would help the struggling economy. Italy was Europe’s third-biggest beneficiary of Chinese investment between 2000 and 2019, according to Rhodium Group, receiving a total of €15.9bn versus €50bn in the UK, €22.7bn in Germany and €14.4bn in France.

As of 2020, more than 400 Chinese groups also held stakes in 760 Italian companies across “highly profitable or strategic sectors”, according to Italy’s parliamentary committee on national security, Copasir.

But today, partly because the pandemic has left many Italian businesses vulnerable, Draghi’s government is taking a less lenient approach towards strategic foreign investments than previous administrations and is not holding back from exercising its golden rules to curtail them.

Last month, buttressed by €205bn of EU recovery funds, Italy co-ordinated with France to undercut the sale of Italian truckmaker Iveco to China’s FAW group. This week, although Rome conditionally authorised a 5G infrastructure supply contract between Vodafone Italy and China’s Huawei, it came with strict security conditions.

“The shift towards China belongs to the past,” said Edoardo Rixi, a League MP. “That political current today barely exists.”

Not everyone believes cooler relations with Beijing are in Italy’s or Europe’s best interests.

Speaking this week, former prime minister Romano Prodi said: “Up until a few months ago . . . the situation [between China and the EU] was more relaxed, but now the accord has been frozen.” Prodi added that, given the mutually strained relations, “both sides must change their attitude . . . right now it’s formally impossible to do anything”.

Geraci also fears the shift by the Draghi government away from China will have economic repercussions for Italian companies in Beijing.“Officially the market for Italian goods in China is €13bn a year, but in fact it is three times that size when you count products made in Italy that then are bought by China via third countries. It is a hugely important market for us.”

How relations might be recalibrated, though, remains an open question.Lia Quartapelle, a member of the Italian parliamentary foreign affairs committee for the centre-left Democratic party, said that the previous pivot towards China was an aberration of Italian foreign policy that opened a “geostrategic gash” in the heart of Europe.

Now, however, “Draghi’s calibre not only enables us to reinforce western values, but to be the engine of recovery in the post-pandemic era”, she added.Furthermore, with Germany absorbed by elections this year and France next year, Draghi is an important European player whose staunch Atlanticism could influence broader EU policy towards China.“Italy’s role in keeping the rudder straight will soon become even more crucial,” said Emma Bonino, a former Italian minister of foreign affairs.“Certainly dealing with China’s policy remains complicated; we cannot pretend that the country does not exist,” she added. “We can trade with China as with the rest of the world, but we must be clear about the differences and divergences between us and them.”

Additional reporting by Qianer Liu in Shenzhen