* Demand increase to cap Chinese diesel exports
* Asian diesel margin climbs to nearly 8-mth high
* China H1 truck sales up over 22 percent year-on-year
SINGAPORE, July 28 (Reuters) - Chinese demand for diesel will rise again this year after contracting for the first time in over a decade in 2016, buoyed as the world's No.2 economy shows signs of growth, traders and analysts said.
That could cap increases in exports of the fuel from the world's second-biggest oil consumer, while bolstering benchmark Asian diesel margins already near 8-month highs.
Diesel demand in China is expected to grow by up to 0.3 percent in 2017 and by 0.5 percent in 2018 after shrinking by 3.5 percent last year, said Sri Paravaikkarasu, the head of 'east of Suez oil' at energy consultancy FGE.
"A variety of factors - improvement in mining and industrial activity, commercial vehicle sales and road freight movements - support a gradual revival in China's (diesel) demand," she said.
Diesel, which accounts for about 30 percent of China's appetite for petroleum, is largely used in the country to fuel trucks, along with mining and construction equipment.
Slower local demand coupled with new refining capacity drove Chinese diesel exports to a record high last year, which in turn depressed margins for the fuel in the region. Margins are the profits made on churning out a barrel of fuel.
"For quite a long time, there has not been a situation like what is happening now in ports and jetties in Dalian where ships are lining up fast to load diesel (for domestic delivery)," a Beijing-based trader said.
"This means inventory is low and buyers are keen."
China's 2017 economic growth is expected to top the government's 6.6-percent target. First quarter growth was partly buoyed by higher government infrastructure spending that helped boost industrial output by the most in over two years.
Caterpillar Inc, the world's largest construction and mining equipment maker, said earlier this week that it had seen strong user demand for construction equipment in China, with heavy excavator sales surging about 130 percent in the first half of the year.
Regulations introduced late last year that imposed stronger penalties on the overloading of trucks also boosted truck sales.
Sales of trucks were up over 22 percent in the first half of 2017 from a year ago, data from the China Association of Automobile Manufacturers showed.
While China is a net exporter of diesel, it also imports the fuel through various channels, traders said.
About 1 to 1.5 million tonnes of the fuel is smuggled into the country every month, while traders ship another 1 million tonnes of light cycle oil a month to the country, which is blended and in turn sold as low-grade diesel in China, they added.
(Reporting by Jessica Jaganathan in Singapore; Additional reporting by Tom Daly in Beijing; Editing by Joseph Radford)