As the U.S. economy decelerates, China is increasingly becoming the primary engine driving the worldwide economy. China’s second-quarter GDP grew at a +10.3% annual pace, down slightly from an +11.9% pace in the first quarter and reflecting a “soft landing” as Chinese inflation starts to moderate.

Another piece of good news is that China’s inflationary housing bubble has stopped expanding, while Chinese exports are still booming. As a result of China’s export growth, the U.S. trade gap with China expanded to $22.3 billion in May, the highest level since last October and a +15% gain over April’s trade deficit level. This trend could put downward pressure on U.S. GDP growth. Since the U.S. trade deficit subtracted -0.8% from first-quarter GDP growth, May’s deficit increase could hurt second-quarter GDP.

China’s exports have now surged +44% in the past 12 months. This trend is not showing any signs of slowing down. In fact, due to a Chinese labor shortage, wages are now rising, which will help boost China’s domestic consumption. China’s retail sales rose +18.3% in June (“down” from 18.7% in May), while its industrial production rose 13.7%, down from 16.5% in May. This means China’s “soft landing” is comparable to a NASCAR race driver slowing from 200 miles per hour (mph) to only about 185 mph.

You might be surprised to hear that a land of 1.3 billion people has a “labor shortage,” but China’s one-child policy has limited the number of new young skilled workers entering the Chinese labor force. Demographers say that Chinese workers in the 16-to-24 age bracket will fall by 33% in the next 12 years. Some factories are operating at 15% to 20% under labor capacity, forcing some bosses to bribe new workers with promises of more time off and higher pay — trends which will boost domestic consumption.

Bottom line, a strong China (reflecting a strong Asia and Latin America) will boost overall global growth, while a weak U.S. dollar helps U.S. manufacturing, exports and corporate earnings for multi-national U.S. companies. 2010 is already shaping up to be a great year for worldwide economic growth, thanks to a growing middle class in many emerging markets. As a result, investors are increasingly finding that the safest way to prosper from strong growth in emerging markets is to buy strong multi-national companies.

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