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China's export growth is set to slow in the second part of the year from the breakneck pace set in the first six months of 2021, but sustained external demand and a delivery lag in orders should still be enough for trade to continue as the economy's main driver, policy advisors told MNI.

While the 28% growth in yuan terms, 32.2% in U.S. dollar terms, seen from January to June was lifted by base effects versus the Covid-hit first half of 2020, exports should still manage to sustain a double-digit pace during the rest of this year, advisors interviewed by MNI said.

Exports contribute about 20% to China's GDP.

One factor is that countries like India, Vietnam and Indonesia face a growing wave of Covid-19 Delta variant infections, offering chances for Chinese exporters to fill gaps, said Huo Jianguo, former head of the Chinese Academy of International Trade and Economic Cooperation, affiliated with the commerce ministry.

"Orders may not be a major problem as many exporters have already taken orders till November to get ready for Christmas sales," Hou said.

China's economy expanded at a slightly slower than expected pace in Q2. The People's Bank of China last week cut the cash reserve requirement ratio for banks in a likely pre-emptive move against a slowdown ahead.

PIVOT

China's ability to pivot in the global supply chain, which boosted electronics and medical exports last year, could combine with fresh external demand and a delivery lag of orders from H1 on shipping bottlenecks and shortages of semiconductor chips.

That could provide strong momentum through the rest of the year, said Yu Miaojie, a member of the Economic and Trade Policy Advisory Committee of the commerce ministry.

As manufacturing recovers in the U.S., Europe, that opens a window for intermediate products from China as people head back to offices and factories, said Tu Xinquan, dean of China Institute for WTO Studies at the University of International Business and Economics.

CAUTION, YUAN STRENGTH

But there will be some slowdown evident, according to Hou.

"China's export growth may moderately slow down month by month in H2 due to the high comparison base from the same period last year," Huo said. "Export growth may face certain difficulties in Q4," he added.

Huo said that higher raw material and freight costs and a stronger yuan are eroding some exporter profit margins.

To respond, policymakers should use targeted measures to help small and medium companies that he said make up over half of total exports, such as encouraging the use of currency risk hedging tools and offering support for their overseas financing and borrowing, Huo said.

A stable yuan is conducive to exporters, Huo continued, expecting the currency to remain relatively stable around 6.4 to the dollar into the rest of the year, which is considered "acceptable" to exporters.

Yu however said the yuan may strengthen to 6.2-6.3. But Yu said a stronger yuan won't necessarily curb exports if there is healthy external demand and competitive products.

Yu expects the trade surplus could reach about CNY3.8 trillion this year, up almost 3% from a CNY3.7 trillion surplus last year. The trade surplus reached CNY1.63 trillion in H1, and Yu expects a more than CNY2 trillion surplus during the second half, mainly supported by seasonal holiday orders.