UPDATE 2-US groups say "alarmed" by China's purchase rules

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By Doug Palmer and Lucy Hornby

WASHINGTON/BEIJING Jan 26 (Reuters) - U.S. business groups called on top U.S. officials to pressure China on moves to keep out foreign high-tech companies, adding yet another irritant to ties strained by currency, trade and Internet freedom issues.

The appeal, in a letter to top U.S. officials including Secretary of State Hillary Clinton, comes as China formulates regulations for policies meant to encourage domestic industry to ascend the value chain.

Foreign industry fears that incentives for government purchasers to prioritise domestically developed products could lose them valuable contracts.

"For several years, the Chinese government has been implementing indigenous innovation policies aimed at carving out markets for national champions and increasing the locally owned and developed intellectual property of innovative products," the business groups said, according to a text made public by the Business Software alliance.

"We are increasingly alarmed by the means China is using to achieve these goals."

The appeal by the business groups follows another letter with similar concerns addressed to the Chinese leadership in early December. The latest salvo is aimed at generating more U.S. government support on this issue, signatories said, in what is shaping up as a quarrelsome year for U.S.-China trade relations.

Signatories urged the Obama administration to make the issue a top priority and work with the business community and foreign governments to develop a "strong, fully coordinated response to the Chinese government."

China and the U.S. are already squaring off on a number of issues, including currency, market access, arms sales to Taiwan and climate change. China was stung by Clinton's calls for greater Internet freedom last week, while Google Inc's (GOOG.O) threat two weeks ago to pull out from China following a hacking attack soured the relationship.

INDIGENOUS INNOVATION

The 19 U.S. business groups complained China's "indigenous innovation" programs aimed at promoting high-tech national champions exclude "a wide array of U.S. firms from a market that is vital to their future growth and ability to create jobs here at home."

Their most immediate concern were new rules issued by China in November to establish a national catalogue of products eligible for significant preferences when Chinese government agencies are making purchases.

China had set that broad goal a few years ago, but in the absence of the catalogue it was not effectively implemented.

Products must contain intellectual property developed and owned in China to be listed in the catalogue, making it "nearly impossible" for American firms to qualify unless they are prepared to establish Chinese brands and transfer their research and development of new products to China, the groups said.

"This directive targets some of our most innovative and competitive manufacturing and service industries, including computers, software, telecommunications and green technology. Once this system is in place, it is expected to be expanded to other industries," the groups said.