Donald Trump’s “Big, Beautiful Bill” of tax and spending cuts passed through the House early this morning, despite the government’s auction of 20-year bonds the previous day causing yields to leap. This response from bond vigilantes has rumbled on into today, much like when, in the aftermath of “Liberation Day”, investors dumped US Treasury paper until Trump backed down and suspended his tariffs.

This is to say that if the government continues to spend on credit, and offers no clear path for arresting the growth of its debt, investors will demand ever higher interest rates on the money they lend to it. That could risk locking in a spiral of rising debt costs which ultimately chokes off the economy. It’s no wonder the US stock market is floundering, as its own investors question what the country’s growth prospects will be amid this kind of impasse.

As the largest and most liquid market in the world, the US will continue to set the tone for most of its peers. And what is complicating things stateside is that foreign demand, which had so long been resilient, has recently begun to soften. As global investors reconsider the safety of US assets, they have been holding off making purchases, the result being not only rising bond yields and a flat stock market but also a falling dollar. Yet as demand drops, the supply of government paper only rises, since the US deficit shows no sign of slowing.

Nevertheless, if the American government has become a poster child for profligacy, the problem isn’t confined there. Across the developed world, interest rates on government debt are rising, and bond auctions are starting to encounter resistance from investors. On Wednesday, British and Japanese bond yields rose even faster than those in the US — the first reflecting a bad inflation report, the latter pointing to growing anxiety about the government’s fiscal management.

But the global picture is even more interesting. While the world is now awash in debt, this is not a universal problem. Western governments, fuelled by cheap credit and the huge run-up in pandemic-era debt, account for most of the planet’s borrowing. Add the private borrowing of their citizens, and their debts now account for several times their annual output.

While debt crises used to be thought of as a developing-world problem, most major governments there have since got their fiscal houses back in order. As a result, while investors have been demanding higher returns on loans to Western governments, since the start of the year bond yields in India, Nigeria, Brazil and Mexico have all been trending downwards.

It’s obvious why. With better growth prospects and more prudent budgeting — not just by governments, but by the private and household sectors too — the countries of the developing world are starting to prove more attractive as long-term prospects for bond investors. If Western politicians continue to wave off the concerns of their lenders, they will continue to receive negative responses that choke off their credit supply. It happened in Britain three years ago; will America be next?

---

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).

jarapley

---

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.

---

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

miquelvilam

---