US decline leaves China tipped as next economic superpower while pressure on US bonds is set to affect eurozone crisis

Heather Stewart, Tania Branigan in Beijing, Dominic Rushe in New York
The Guardian, Monday 8 August 2011

When India joined China in criticising the United States' chaotic handling of its hefty debts this weekend, describing the challenges facing the White House as "grave", it was the clearest indication yet that the old order had been swept away.

Until recently the US was the unassailable economic superpower, and the prospect of the White House being bossed about by the bond markets – let alone by Beijing or New Delhi – was unthinkable.

But following a week when an estimated $3tn (£1.8tn) was wiped off the value of world shares, Friday's downgrade of America's cherished AAA rating to AA+ by Standard & Poor's is set to cause more turmoil on global markets and potentially jeopardise Europe's attempts to solve its own financial crisis.

With currency markets, particularly the dollar, expected to come under pressure, and US bond yields almost certain to rise, this could have the knock-on effect of raising borrowing costs in the eurozone at a time when Spanish and Italian bonds in particular have seen yields soar.

This could prove to be a tipping point for the transfer of global power from the US to its great rival China, even though the fortunes of Asia and the west are inextricably linked.

The boom of the past two decades in the US, the UK and much of Europe came at the expense of an extraordinary growth in borrowing, much of it from the Chinese and other fast-growing Asian economies, which were happy to keep piling up Treasury bills and buying blue-chip companies, so long as the billions of dollars they spent were recycled into cheap consumer goods.

At the height of the credit crunch, it seemed both lenders and borrowers were finally getting their comeuppance, but as the Bank of England governor, Mervyn King, has repeatedly pointed out in the past 12 months, the "global imbalances" that led to the crisis – the vast trade deficits and debts – never went away.

Gerard Lyons, chief economist at Standard