March 25 (Bloomberg) -- China’s economy will recover strongly in the second and third quarters as a 4 trillion yuan ($585 billion) stimulus package takes effect, central bank adviser Fan Gang said.

“The 4 trillion yuan is different from the U.S. stimulus package -- we don’t have a financial black hole to fill, so all this money will go to the economy and drive demand,” Fan said today at a conference in Hong Kong. He said the economy had “already seen some recovery.”

China’s growth slid to the weakest pace in seven years in the fourth quarter as trade slumped because of the global recession. Fan said he saw positive signs across investment, real estate and the automobile industry and that the stimulus will help the government to meet its target of an 8 percent expansion this year.

“It won’t be easy reaching 8 percent with the plunge in exports and the drag on production from falling external demand,” said David Cohen, an economist with Action Economics in Singapore. “But China does have more potential than most places to offset export weakness with domestic demand.”

The yuan traded at 6.8315 against the dollar as of 5:07 p.m. in Shanghai from 6.8296 yesterday. The Shanghai Composite Index fell 2 percent, paring this year’s gain to 26 percent.

China will make more cuts to export taxes on textiles, garments, steel, non-ferrous metals, petrochemicals and electronics from April 1 to help revive key industries, the State Council said in a statement today.

Laying Foundations

China’s growth slowed from 13 percent in 2007 to 6.8 percent in the fourth quarter of last year. The nation is yet to report first-quarter gross domestic product.

“The stimulus package will work,” said Fan, who’s the academic member of the central bank’s monetary policy committee. He said a “very strong recovery in the second and third quarters” would lay the foundations for further growth.

Fan cited a surge in investment, increased property sales, automobile-industry growth and signs that electricity and steel consumption, while still below normal levels, are starting to recover. Urban fixed-asset investment rose 26.5 percent

Still, company profits may be weaker this year, the labor market hasn’t recovered, businesses face overcapacity and the real-estate market is “very slow” after sagging last year, he added.

China’s economy, the world’s third biggest, may be the first to recover from the global recession because of the stimulus spending, Zhang Yutai, director of the Development Research Center of the State Council, said March 23.

Currency Appreciation

The central bank has halted the yuan’s gains against the dollar since July last year, holding down the price of exported products as global demand dries up.

Fan echoed central bank Governor Zhou Xiaochuan’s comments this week about the possible benefits of a new global reserve currency, saying China had suffered “quite badly” from the dollar’s role as a standard.

China is weathering the global slump better than many other countries because its banks were largely unscathed by the financial crisis and the government quickly implemented its stimulus plan, the World Bank said in a March 18 report. It saw “early signs” that China’s economy is stabilizing. in the first two months of 2009 from a year earlier.

Premier Wen Jiabao unveiled the stimulus plan, including spending on houses, roads and railways, in November. New loans quadrupled in February from a year earlier after the central bank dropped restrictions on lending and the government pressed banks to support the plan.

Enough ‘Ammunition’

The premier said on March 13 that China has “adequate ammunition” to revive the economy and can add to the stimulus package at any time. He said the 8 percent growth target was “difficult but possible” to achieve.

Still, the World Bank cut last week its forecast for China’s growth this year to 6.5 percent from a previous estimate of 7.5 percent as the global slump deepened. The nation’s exports fell by a record 25.7 percent in February.

“People are looking to China, hoping it can lead the way and overcome the headwinds from weak export demand that everyone is facing,” said Cohen. “Whether it can do it is the big question. Even 6 percent to 7 percent growth would still be the envy of other major economies and the world is looking to China to help get the ball rolling.”

To contact the reporter on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net

Last Updated: March 25, 2009 06:33 EDT