As world oil prices have increased, "this reminds us all (of) the importance of alternatives. It doesn't mean we won't continue to use petroleum, but (fuel cells) offer the opportunity for each country and region to use the source of hydrogen that's most efficient," Wagoner said.

Wagoner made the comments following a signing ceremony between GM and its main Chinese partner, Shanghai Automotive Industry Corp. (Group). The two companies have agreed to work together on research and development related to hybrid and fuel cell vehicles.

GM offered few details on how exactly it plans to cooperate with Shanghai Automotive, also known as SAIC, to develop the automobile technology. Earlier this month, GM said that it and SAIC would test run their first hybrid diesel- electric bus next year. The bus uses GM's hybrid engine technology and key parts would be imported from the U.S

China's interest in such technology is increasing in step with a rise in pollution from automobiles and the country's reliance on imported oil. And foreign automakers, although mostly keeping their key technology offshore, are starting to test some of their high-tech vehicles in China.

DaimlerChrysler AG (DCX) has said it plans to test three hydrogen fuel-cell buses in Beijing next year, and Toyota Motor Corp. (7203.TO) said last month that it will assemble and sell its Prius model, a gasoline-electric hybrid, in China.

"The demand for energy sources are going to grow here as the economy grows and if there is a place in the world where it makes sense to develop (alternative energy sources) it seems like China would be one of the leading opportunities," Wagoner said.

"We've already seen that we can recruit some very young smart engineers here and they have developed very quickly in their knowledge to support the auto industry," he said. "By doing things like beginning to do some research with them, bringing over fuel cells and having them provide the support for that, I think it's beginning to build a base where we expect to get a nice contribution from these people."

But Wagoner said that the cheaper labor cost for researchers in China wasn't an important factor in expanding GM's research on future fuel technology in China.

"I wouldn't characterize R&D as being particularly expensive in the U.S. The nature of R&D is not so much how much you pay the individuals who are doing it, but who can come through with the breakthrough ideas," he said.

China is increasingly gaining importance for GM, which last year made a net profit of $437 million from its China operations, and Wagoner expects China to become GM's second-largest market in terms of unit sales behind the U.S. this year. He said the recent slowdown in the market could turn around next year.

"Generally (GM Sales) have been leveling out and the outlook is that the market will continue to see relatively slow growth for the next six months or so," he said. "But in our industry you really have to look longer term, and so we're continuing heavily with our investments because we see the growth will pick up. Whether it's in April next year or June we'll have to see."

Wagoner said China's first interest rate hike in nearly a decade this week wasn't a large enough increase to affect the market in the near term. "We'll have to see how it goes. We have not at this early moment adjusted our forecast because of it, but we have to watch and see," he said.

-By Jane Lanhee Lee, Dow Jones Newswires;