It is not about "UK standing up to China". It is about UK universities becoming money making machines that depend on money coming with foreign students. If X is a big source of your income, then X gets to mandate how you operate, regardless of who X is. If UK universities did not have this kind of dependencies, then they would not have this kind of problems. If they did not need the chinese money that much in the first place, they would not have abided to such demands from China.
The soft power aspect of this dependency is a problem, but the bigger problem is that it has made UK universities dependent on a fundamentally unsustainable revenue stream. Chinese students come to study in the UK because British universities are perceived as better than Chinese universities, and that reputation rubs off on the students' own prospects when they return home.
But, that effect can only really last a couple of generations at most: the students go home, a proportion of them become (well-trained) academics, and the Chinese universities that those academics work at become competitive with the foreign universities. A similar thing happened with the "plate glass" universities of the 1960s UK; initially those were bootstrapped with Oxbridge academics, but within 30 years they were standing on their own feet.
As far as I can see, current UK universities have no plan to replace the revenue that will be inevitably lost when the Chinese universities also begin to stand up on their own feet.
It's sort of the same problem from different perspectives. If the UK deemed it could affort higher education without Chinese money, the UK would by default stand up to China, because of the incentives you describe.
I think the universities themselves are a problem, regardless of the societal aspect.
How I think about it:
Let us say, as a though experiment, that two things are true.
1. Outside of the university orgs, absolutely no one cares if the universities have enough resources to teach the engineers, scientists, teachers, doctors, etc. that society needs.
2. Outside of the university orgs, absolutely no one cares if half the people equipped to be good university teachers cannot find work.
In that hypothetical scenario, would the universities change? Saying no the Chinese etc. means that they would have to downsize.
