Loses from pirated software to surge 40 percent to $5.4 billion in China last year, but things are getting better, a trade group said on Tuesday.

HONG KONG, May 15 - China's booming demand for personal computers caused losses from pirated software to surge 40 percent to $5.4 billion last year -- but things are getting better, a trade group said on Tuesday.

Counterfeit PC software in use in China fell four percentage points -- more than any other country in Asia -- to 82 percent from 86 percent, underscoring progress in the world's second largest computer market, said Jeffrey Hardee, vice president and Asia director of the Business Software Alliance.

"It's difficult to bring down piracy levels when the market is growing so rapidly," Hardee told Reuters in an interview.

Widespread intellectual property rights violations across a range of industries, including software, music, movies and fashion, have been a major source of friction between China and major trade partners the United States and Europe.

China's rate of software piracy dropped in part because of a new regulation mandating that government offices use legitimate software, and last year's regulation requiring all computers made or sold in China be shipped with genuine operating systems, Hardee said.

In 2006, 23 million PCs were sold in China, second only to the United States, an annual increase of 17.5 percent, according to statistics quoted by China's Xinhua news agency. The market for legitimate software was $1.2 billion last year, up 88 percent on the previous year, BSA said.

Last month, the Bush administration, under pressure from Congress, announced it would take legal action against China in the World Trade Organisation for failing to stop widespread piracy and counterfeiting of American goods.

Hardee said China has made progress on the policy front and in educating people about pirated software, but a critical link -- enforcement -- remained limited.