"Our domestic software industry is bigger than India's and our hardware industry is much, much bigger, but we plan to build an even larger outsourcing industry,'' said Zhang Qi, director-general of software development at the ministry.

The State Council issued a series of policies earlier this year that will offer tax incentives to domestic software companies that sell outsourcing services overseas. India's software industry exported US$17.3 billion worth of outsourcing services last year, more than six times the US$2.6 billion generated by mainland software exporters.

Speaking at a conference in Beijing, Zhang said: ``Our software outsourcing exports have been growing more than 70 percent a year for the past three years and we believe we can sustain this growth far into the future.''

Ken Wasch, president of the US-based Software & Information Industry Association, agreed. ``There are fundamental shifts in the way software is being developed globally and the opportunities for Chinese companies to grab global market share are enormous,'' he said. ``The back-end of software services can be hosted in Beijing, Harbin or Shanghai as easily as in San Francisco or San Jose, and for much less.''

China's 8,700 software companies generated 220 billion yuan (HK$206.76 billion) of revenue last year, with exports making up only 10 percent of the total, according to the ministry.

Mainland software outsourcing companies have derived most revenue from Japan, with 60 percent of the US$2.6 billion in exports last year coming from Japanese clients like NEC and Fujitsu. US companies, such as Microsoft, accounted for 15 percent of revenue while European firms made up for 10 percent.

``Chinese companies increasingly are targeting US clients,'' said Lorinda Li, spokeswoman for Beijing Beyondsoft, which counts Microsoft as its top client in terms of revenue. ``US companies tend to be more willing to pay more for our services.''

Software industry revenues have been growing at more than 30 percent a year for the past five years, with 2004 growth reaching 34.7 percent, according to data provided by the ministry.

China's software industry could grow even faster if the government cracked down harder on piracy, which US officials say is the worst in the world.

``The government of China has passed laws protecting intellectual property rights,'' US Secretary of Commerce Carlos Gutierrez said in Beijing on June 3. ``We would like to see more enforcement. We would like to see more market access.''

The central government said April 21 that it imposed almost 8,000 penalties and fines on copyright violators last year.

On December 21, the government lowered the threshold for prison terms and made piracy of intellectual property punishable by as much as a seven-year jail term. BLOOMBERG