China's economy has touched bottom but further interest rate cuts remain an option, a Chinese central bank adviser said on Wednesday.

A 25 percent rise in car sales and accelerating investment in China indicated the world's third-largest economy was showing signs of improvement, said Fan Gang, who sits on the Chinese central bank's monetary policy advisory committee.

"Before (the economy) bottoms out, it has to bottom. I believe it has bottomed, with the stimulus package and signs of recovery in some industries," Fan said in an interview during the Credit Suisse Asian Investment Conference in Hong Kong.

Steel and energy consumption were declining at a slower rate and may have turned positive in March, while the transportation sector was warming up, he said.

His comments are a further sign of growing confidence among Chinese leaders that the country can achieve its target of 8 percent economic growth this year, despite the chilling effects of the global slowdown, which has seen Asian exports collapse.

However, while a potential recovery in China would provide a psychological boost to the global economic outlook, it would have limited real impact on worldwide growth, said Ben Simpfendorfer, chief China economist at RBS.

"China actually imports very little from the rest of the world other than commodities or goods for export processing," Simpfendorfer said.

"So recovery would benefit commodities' producers - Australia, Brazil, Chile. But the world might be surprised by how little impact a China recovery would have on the rest of the world."

Liquidity flood

Growth of 8 percent would be the country's lowest growth rate since 1999, and the World Bank forecasts China will expand by only 6.5 percent this year despite government stimulus measures.

Fan said further interest rate cuts remained an option.

"I don't think anybody would rule it out. But it depends on China's liquidity, how China's recovery takes place and how the stimulus package works out," he said.

As exports have slumped in the face of sharply declining global demand in recent months, high inventories and overcapacity in some industries posed the biggest short-term challenges for the Chinese economy, Fan said.

"Now corporate investment and real estate investment are going down...that's the most crucial issue for this year and next year: how to revive corporate investment," he said.

China's sharp economic slowdown meant deflation was an issue in the short term, he said, but he warned that inflation could resurface and become a problem longer term.

"The good news is that deflation is mainly coming from the fall in oil and commodity prices, which may cut costs for Chinese manufacturing companies," Fan said.

"But with this monetary easing and fiscal stimulus we need to be careful, particularly when there is a global liquidity flood, we could see some rebound in oil and commodity prices."

Rising inflation coupled with a weakening US dollar would renew pressure for an appreciation of China's yuan currency, he said.

"That is always the case...but of course we are concerned about that," he said.

The global financial crisis, as well as the Asian financial crisis a decade ago, showed China had been right to reform gradually, Fan added.

"China's prudence has paid off. We've been prudent on development, on regulations...we didn't rush into derivatives."

Fan reiterated calls by People's Bank of China chief Zhou Xiaochuan this week for a reform of the global monetary system and the US dollar's role as the single global reserve currency.

"A more diversified monetary system is maybe more stable, more productive, more efficient and more disciplined," said Fan.

"In the short run, some encouragement of the development of a diversified and competitive monetary system would be useful because competition between currencies can create more discipline."

(China Daily March 26, 2009)