Under draft regulations drawn up by the Ministry of Finance and the Ministry of Information Industry, companies wishing to sell software to government offices will have to either be certified as domestic enterprises or qualify as "preferred non-domestic'' suppliers.

``They haven't specifically excluded foreign companies from participating, but it looks like a step toward that,'' Michael Mudd, Asia-Pacific director of public policy for the Computing Technology Industry Association, said. ``It has the potential to lock a big portion of our members out of a very significant part of the market.''

The group, known as CompTIA, has more than 20,000 members in 89 countries, including Microsoft and International Business Machines (IBM), though it also includes makers of hardware and providers of telecom services.

Though many big software companies have a presence in China, Mudd said it would be difficult for them to qualify as domestic companies. Among other things, it requires that the intellectual property rights for their software products be assigned to an entity within China.

Qualifying for the ``preferred non-domestic'' list might be easier - it would be based on indicators such as the size of investment in China - though Mudd said the implied second-class status is not welcome.

Still, he was careful not to criticise the measures, which may not take effect in their current form, too harshly.

The fact that there are to be rules about government purchases of software is a step forward from the previous tolerance of widespread use of pirated software. More than 90 per cent of all software installed in China is illegally copied, according to the Business Software Alliance, another foreign industry group.

In recent years, the central authorities have been gradually trying to change government offices over to using legitimately purchased software. However, they have long indicated a preference for domestic products, in part because they do not have the money to buy high-end foreign products for the desktop of every public servant.

``The government wants to get more bang for their buck,'' Mudd said.

In line with that thinking, the draft rules give special treatment to open-source software, which can more easily qualify as domestic. The best-known example of open-source software is the Linux operating system, available for free use. ``We thought it indicated a preference for open source as opposed to commercial software,'' Mudd said, arguing that software providers should compete on price and quality, rather than how their software is developed.

Neither Mudd nor third-party market researchers have solid figures for the size of China's government software purchases.``It's probably bigger as a percentage of software [sales] than most other countries because the government is such a large player,'' he said.

But, spending on software is thought to be on the upswing as growing numbers of bureaucrats' offices are automated, and local governments experiment with new ideas like online applications for permits and licences. ``They have very ambitious projects for e-government,'' Mudd said, adding that the main cause for optimism is the government's increasing willingness to openly discuss its policies.DOW JONES NEWSWIRES