China's software and IT services sector will catch and exceed the UK's output within five years.
China's strength lies in robust software engineering programs for students, according to Developing the Future 2007, a report on the UK's IT industry.
The report was cosponsored by Microsoft, the British Computer Society, City University London and Intellect, a UK high-tech trade group.
China is also proving to be a cheaper location than India, as software development costs in India are rising 15 to 20 percent, wrote Sally Ernst, chief executive of Sinocode International, an IT software outsourcing company, in the report.
"All evidence points to China developing its own national software industry even faster than was the case in India," Ernst wrote.
About 40 percent of the UK's gross domestic product is dependent on "knowledge-based" services, a terms encompassing financial and IT services. The report concludes that the UK will need to invest more in education and skills or face falling behind.
China's 35 national training schools are graduating 800,000 software engineers annually from a population of 1.3 billion. By comparison, the UK, with a population of about 60 million, turned out around 27,000 graduates with IT-related degrees in 2001, but that figure dropped to 14,700 in 2005.
Adjusted for population, China still produces more than twice as many software engineers than the UK a year.
The problem is that while software engineers have well-paid careers, UK "students see this world as filled with problematic stereotypes, career dead ends and dull office work", wrote Peter McOwan, an academic at the University of London.
However, much of the future prosperity of the UK depends upon the health and growth of the IT sector, the report said.