Can china grass (agar-agar) be used as a substitute to gelatin in fondant cake icing?
Yes, there are several vegetarian fondant recipes using agar. Most tend to substitute it for gelatin in equal amounts.
Keep in mind two things:
Agar has a much higher melting point and sets firmer than gelatin, so the resulting icing will be less "melty".
The hydration process is completely different from gelatin. It doesn't bloom; it needs to be dispersed in cold/warm water and then heated all the way up to 90° C with constant agitation.
I'd recommend that you include the glycerin in any agar-based fondant recipes - they'll make it a lot easier to work with. Some gelatin recipes leave it out but IME you need it more for agar.