It’s been called “one of the most expensive tears in history”. It has since been suggested that Chancellor Rachel Reeves’s visible distress during Wednesday’s PMQs, when Prime Minister Keir Starmer chose not to express his full confidence in her financial stewardship, resulted from a personal episode. Nevertheless the sight unnerved bond markets. Yields spiked by nearly a fifth of a percent and the pound plunged, shedding over 1% of its value in just a matter of hours and reviving painful memories of the bond market meltdown three years ago.

Ever since the Liz Truss episode of 2022, Britain has had a touchy relationship with the bond market. When she entered office, Reeves was so determined to keep them on her side that she elevated investors to a higher rank than her own party. Constrained as she was by her own election promises not to raise most taxes while increasing spending and keeping the deficit down, her strategy to restore Britain’s economic health never looked very plausible. But while bond investors never showed much faith in her economic plan, they at least considered her a safe pair of hands.

The thought of her suddenly departing over the botched welfare reform bill shows that there’s little appetite for a new chancellor. If a distressed-looking chancellor unnerved the bond market, a sacked one could do even more damage.

It’s a difficult enough time for government bookkeepers as it is. A looming over-supply of government bonds, inflated by expansive German fiscal plans and America’s worsening deficit, make this a very competitive market. If investors have any doubt about the UK government’s seriousness with respect to its future finances, they will stop buying.

But while many are calling for Reeves to be replaced as chancellor, and though her authority has been badly weakened by this fiasco, it’s not clear that sacking her will solve the Government’s problem. It was only after Downing Street expressed its full confidence in her later on Wednesday afternoon that bonds and the pound came back off their lows. The very fact that their value plunged when the Prime Minister initially hesitated to give her his full backing reveals the problem: Reeves may not be a chancellor whom bond investors think highly of, but they like the alternatives even less. You can hardly blame them, given the ranks of the parliamentary party still include MPs who say things like: “I don’t understand why this means tax rises when it’s only a few billion pounds.” For Starmer to sack his chancellor now could cause a full-on panic.

This goes to the heart of the matter. Basing major social policy reforms on purely fiscal considerations is a bad way to do policy for any government. For a Labour government, it’s unforgiveable. However, the final decision to manage matters that way rests not with the Chancellor, but with her Prime Minister. In that sense, if Labour was being really ruthless, it might take the lesson of 2022. Then, the governing party got the bond market back on board by dumping its leader but keeping her (replacement) chancellor.

That seems unlikely for now. Instead, an unstable Starmer-Reeves duopoly may linger as a weakened leadership, wrestling with a growing restiveness on their backbenches. Getting its agenda back on track will now be a monumental task for this government. Given how badly it has managed to bungle things in its first year in office, despite having a huge majority, restoring its agenda may now seem a distant prospect.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).

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China is trying to catch up with America on artificial intelligence. The Wall Street Journal has reported that Zhipu AI — one of China’s six “AI tiger” LLMs — has released a new model that can rival leading US systems, including Anthropic’s Mythos, in cybersecurity tasks such as pinpointing security bugs. While this marks a milestone in China’s drive to catch up with Western AI capabilities, strong performance on a single benchmark does not mean it has taken the lead. Chinese models still lag behind their Western counterparts in broader capabilities, such as autonomous operation. Skepticism is therefore warranted before resorting to hysterical conclusions, but complacency about the geopolitical implications of China’s AI advances would be an even greater mistake.

On the infrastructure side, Chinese AI is still constrained by access to advanced chips, with American labs way ahead in computing capacity as well as investment. Analysis from earlier this year suggests that Chinese models are likely to be at least a few months behind those in the US. But they are still continuing to make progress, or that the geopolitical importance of AI will be decided only by whose LLM has ventured deeper into the technological frontier. The practical applications of AI, countries’ to capture foreign markets, and the application of AI into the real economy will matter just as much.

Here, China may hold an advantage. As with its dominance across many critical supply chains, Beijing may not need to produce the most advanced AI systems — only those that are affordable and widely deployable. In doing so, it could consolidate global influence by supplying functional, low-cost AI at scale.

Beijing seems to be pursuing exactly that path, developing an AI “open-source” strategy that offers affordable, widely available AI models for companies and individuals to use and modify as they wish. The production of the DeepSeek AI model, which matched the performance of Silicon Valley tools such as ChatGPT at a fraction of the cost for users, created goodwill among Chinese models with developers.

The four most popular models on OpenRouter, an AI hardware platform for developers, are now all Chinese. The goal for China is not only to win the frontier-model race, but to make its systems the default layer of AI adoption across industries and global markets. For most economies, the choice is increasingly between an affordable tool they can deploy now and a more robust one that may be out of reach.

And while the countries adopting Chinese models may be exposed to political pressure and cyber threats from Beijing, safer and more capable alternatives matter little if they are unaffordable. American AI companies are already under pressure to monetize products whose operating costs are rising. If Chinese open-source models become the cheap default for startups, universities, governments and businesses across the developing world, then America’s AI lead will be eroded from below.

Perhaps more concerning for America in the long run is how AI can give Chinese manufacturing even more strength, through the ongoing integration of AI as a general-purpose technology. China’s new Five-Year Plan mentioned AI more than 50 times and includes an “AI+” action plan aimed at spreading AI across the economy.

Beijing has been pioneering automation of its critical infrastructure for years, with promising recent results in increasing warplane production capacity. In that regard, China’s open-model strategy and manufacturing dominance will reinforce each other. Cheap, adaptable models accelerate deployment across the real economy while those deployments generate real-world data and use cases that can feed back into further model improvement.

The United States should not dismiss the importance of its lead in the AI race. That lead worries Beijing, not least because a more automated Chinese economy would also become more vulnerable to AI-generated cyber threats. But nor should Washington assume that China cannot catch up with American capabilities over time.

This AI competition represents part of a broader struggle over tech supply chains and geopolitical influence. Decisions over whether to adopt US or Chinese models could produce a more fragmented global reality, with different regions relying on different cloud providers, chips and security structures. The result will likely be a global economy which is divided into competing spheres, rather than one which produces a single winner.

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Miquel Vila is a political and geopolitical risk consultant focusing on industrial strategy, critical infrastructure and global supply chains.

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