Daily SA: U.S., Europe Sound Alarm Over Chinese Legacy Chips Investment (Wed, 02 August 23) – Forward Observer

Daily SA: U.S., Europe Sound Alarm Over Chinese Legacy Chips Investment (Wed, 02 August 23)

Good morning. Here’s your Daily Situational Awareness for Wednesday, 02 August 2023.


  • READ TIME: 8 Minutes, 11 Seconds
  • Inside the Beltway
    • (1) DOJ Indicts Trump on January 6th Charges
    • (2) House CCP Committee Probing BlackRock for China Investments
    • (3) U.S., Europe Sound Alarm Over Chinese Legacy Chips Investment
  • Domestic INTSUM
    • (4) The U.S. Treasury’s Debt Binge
    • (5) Fitch Downgrades U.S. Credit Rating
    • (6) Largest Weekly Crude Oil Inventory Decline in 40 Years
    • (7) Biden Admin Rejects Another Round of SPR Buys
  • Mexico SITREP
    • (8) Guatemalan Ex-Special Forces in Mexico Drug Trade
  • Russia-NATO SITREP
    • (9) Poland Sends Troops to Border With Belarus
  • China & Indo-Pacific SITREP
    • (10) China Cleans House in Strategic Rocket Forces
    • (11) China to Run Four Major Deployments at Once


  • (1) DOJ INDICTS TRUMP ON JANUARY 6TH CHARGES: Former President Donald Trump was indicted by the Department of Justice (DOJ) yesterday for conspiracy to defraud the government, conspiracy to violate rights, conspiracy to obstruct and obstructing an official proceeding.
    • The Trump campaign said the charges were the “latest corrupt chapter” in the continued attempt by “The Biden Crime family and their weaponized Department of Justice to interfere in the 2024 election.”
    • Why It Matters: The DOJ is piling on charges with intent to eat up Trump’s time and money. Small and large donors may continue to abandon the Trump campaign as more indictments drop. Trump’s campaign got a $4 million bump from 80,000 individual donors after he was indicted in April in Manhattan, but only received $1.3 million from 35,000 donors after he was indicted under the Espionage Act in June. Two data points do not establish a trend. Still, if his fundraising and donor count drop again after the latest indictment, and the campaign continues to spend more on legal defense than it raises, Trump’s reelection could be in trouble. The identification of Trump lawyers as “co-conspirators,” some of them facing criminal charges and disbarment for giving Trump legal advice, is setting the stage to criminalize legal associations with opposition political candidates. – R.C. 
  • (2) HOUSE CCP COMMITTEE PROBING BLACKROCK FOR CHINA INVESTMENTS: The House Select Committee on the Chinese Communist Party said it will investigate BlackRock and Morgan Stanley Capital International for facilitating American investment in Chinese firms that bolstered the Chinese military and violated human rights.
    • According to the committee, BlackRock has $429 million invested in Chinese companies that are “against the interests” of the United States.
    • Reps. Mike Gallagher (R-WI) and Raja Krishnamoorthi (D-IL) said it is “unconscionable for any U.S. company to profit from investments that fuel the military advancement of America’s foremost foreign adversary.”
    • Why It Matters: The attempt to “derisk” the U.S. economy from the Chinese economy is running headfirst into decades of economic integration. The foreign policy establishment intended to politically liberalize China by liberalizing China’s economy. However, the outcome has been to outsource critical manufacturing to China and allow Chinese firms to use American investments to spur their own growth. – R.C. 
  • (3) U.S., EUROPE SOUND ALARM OVER CHINESE LEGACY CHIPS INVESTMENT: U.S. and E.U. officials said they are increasingly concerned about China’s push to manufacture older-generation semiconductors and are worried China could dump their excess production into the market and drive competitors out of business.
    • Commerce Secretary Gina Raimondo said the amount of money China is pouring into an excess capacity of mature and legacy chips is a problem the U.S. and its allies need to get ahead of.
    • Why It Matters: China flooding the market to secure market share, combined with controls on critical minerals, is a likely response to U.S. restrictions targeting foreign investment in Chinese tech and blocking Chinese access to advanced computing technologies. During the height of COVID, shortages of legacy chips hit U.S. manufacturers, and China flooding the market might increase supply and drive prices down in the short term. Still, it would put U.S. industry at the mercy of Chinese foreign policy in the long term. – R.C.


  • (4) THE U.S. TREASURY’S DEBT BINGE: The U.S. Treasury’s Marketable Borrowing Estimates report projects near-record numbers for Q3 and Q4.
    • In Q3, the Treasury expects to borrow $1.007 trillion – up from the earlier $733 billion estimate and the second-highest quarterly borrowing ever, only behind the $2.8 trillion spent in Q2 2020.
    • The Treasury will continue issuing massive debt in Q4, expected to be $852 billion.  
    • Why It Matters: The ironically named Fiscal Responsibility Act of 2023, which was signed into law in June, suspended the U.S. debt limit until January 1, 2025 – after the next Presidential election. With a blank check until then, the Treasury should issue about $1 trillion worth of securities each quarter. Unless demand can meet supply, these additional Treasuries will mean higher interest rates. – H.B.
  • (5) FITCH DOWNGRADES U.S. CREDIT RATING: Fitch, one of the three major credit rating agencies, downgraded America’s long-term rating from AAA, the highest quality, to AA+, the second-highest rating.
    • Fitch cited the United States’ fiscal decline over the next three years, a high and growing general government debt burden, and the erosion of governance as the reasons for the downgrade.
    • Tighter credit conditions, a weakening business environment, and a slowdown in consumption will push the U.S. economy into a recession in Q4 2023, according to Fitch’s projections.  
    • Why It Matters: Fitch joins Standard & Poors (S&P) in downgrading America’s credit rating. When S&P did so in August 2011, all three major U.S. stock indexes fell between 5-7% in one trading day, and capital moved to bonds. This could repeat, but a 1929 or 1987-style stock market crash is unlikely, with global capital flowing to U.S. equities. – H.B.
  • (6) LARGEST WEEKLY CRUDE OIL INVENTORY DECLINE IN 40 YEARS: The American Petroleum Institute (API) reported a massive, unexpected drop in America’s oil inventories.
    • The API’s survey data showed a week-over-week crude oil decline of 15.4 million barrels – far surpassing analysts’ expectations of a 900,000-barrel drop.
    • Gasoline inventories saw another 1.68-million-barrel decline, which puts inventories 7% less than the five-year average.
    • Why It Matters: As we’ve discussed, falling oil supply, not demand, is the metric to monitor. While crude oil inventories are declining, U.S. oil production may have already topped out at 12 million barrels per day. Meanwhile, global demand hit a record in July. The U.S. will need to import more crude oil to keep up with demand, but prices of crude and refined products will still climb. – H.B.
  • (7) BIDEN ADMIN REJECTS ANOTHER ROUND OF SPR BUYS: The Department of Energy will not take up any purchase offers to refill the Strategic Petroleum Reserve (SPR) from its latest round of bids, according to people familiar with the matter.
    • DOE Chief of Staff Bridget Bartol said the Energy Department is committed to its replenishment strategy for refilling the SPR.
    • Why It Matters: Prices will likely stay high with OPEC+ production cuts. Refilling the SPR, as we’ve mentioned before, is likely to take more than a decade at the rate the Biden administration has been making purchases. – R.C.



  • (8) GUATEMALAN EX-SPECIAL FORCES IN MEXICO DRUG TRADE: A Mexican newspaper published a front-page story yesterday accusing Guatemalan ex-Special Forces – also known as Kaibiles – of engaging in the drug and weapons trade on the Mexico-Guatemala border. Mexican President Andres Manuel Lopez Obrador (AMLO) confirmed the gang’s presence in a press conference yesterday.
    • AMLO boasted that his social programs had decreased violence in the southern state of Chiapas, which borders Guatemala, although a reporter questioned him about an event on Monday where an armed gang stopped traffic for 10 hours on a major highway by burning three vehicles in the middle of it. AMLO said the blockade was actually a message to competing gangs, where an armed group promised to bring order to the area. (This may actually be true. The blockade may have been set up by an “autodefensas” self-defense group threatening the area’s gangs.)
    • AMLO then accused conservatives of wanting to use “coercive measures” to combat gangs, as opposed to his “hugs, not bullets” approach. “That is the difference we have with the conservatives. They want to solve everything with coercive measures. That is also why [former Mexican President Felipe] Calderón declares war, we do not. We bet on improving the living conditions, the working conditions of the people, to fight poverty, to fight inequality. This is more effective and more humane than the other,” AMLO explained.
    • Why It Matters: The Mexico problem runs much deeper than illegal immigration and cartels operating along the U.S. border. Southern Mexican states like Chiapas, Oaxaca, and Michoacán – Michoacán alone recorded over 10,000 murders during AMLO’s tenure – are lawless zones run by competing gangs that prove AMLO’s “hugs not bullets” strategy is a failure. In previous election cycles, we’ve seen mass violence targeting politicians. Nearly 90 politicians were assassinated in the lead-up to the 2021 midterms. Critics say that the leftist Morena party is in cahoots with the cartels and behind the violence. As such, any politician promising to bring order back to Mexico by going after the gangs and cartels risks being assassinated during the 2024 election cycle. Given Morena’s likely involvement in targeting opposition politicians, the assassination of a major political rival from the center-right Va Por coalition is a distinct possibility. – M.S.


  • (9) POLAND SENDS TROOPS TO BORDER WITH BELARUS: Poland rushed military units to its eastern border on Tuesday, hours after Belarusian military helicopters allegedly violated Poland’s airspace.
    • Belarus denied it violated Poland’s airspace, although local residents posted photographs of Belarusian helicopters flying over or near their border villages.
    • Poland’s defense minister said Warsaw had notified NATO of the violation and was sending troops and combat helicopters to reinforce its border.
    • Why It Matters: Poland and Belarus have a history of animosity. While it is possible that Belarusian helicopters violated Poland’s airspace at extremely low altitudes, it is unlikely that the flights were anything other than a provocation or possibly pilot error. Belarus was reportedly conducting military exercises on its border with Poland. Now that Poland has reinforced its borders, such incidents could lead to direct armed conflict between Poland and Belarus with follow-on implications for NATO. – M.M.

China & Indo-Pacific SITREP

  • (10) CHINA CLEANS HOUSE IN STRATEGIC ROCKET FORCES: China’s commander of its strategic rocket forces and several of his staff were fired after being placed under investigation by the Chinese Communist Party anti-graft body, the Commission for Discipline Inspection.
    • State-backed media said General Li Yuchao, political commissar Xu Zhongbo, and several senior officers were under investigation and had been relieved of duties.
    • Western analysts noted the change of commanders around the same time as reports of the mysterious deaths of two senior government officials and the disappearance of China’s foreign minister Qin Gang.
    • Why It Matters: The CCP uses allegations of corruption in place of admitting that senior officials had been caught spying or leaking confidential information. In October of this year, the China Aerospace Studies Institute at the USAF Air University published a 255-page unclassified report that revealed the locations and functions of all nine strategic rocket force bases. The report has been criticized for exposing sensitive information and source-revealing details. It is likely that the firing of the rocket forces leadership was related to the U.S. report. China is ratcheting up its internal security operations, an early warning indicator for potential military action. – M.M.
  • (11) CHINA TO RUN FOUR MAJOR DEPLOYMENTS AT ONCE: Yesterday, Chinese media reported the Shandong Carrier Strike Group (CSG) will be deploying beyond the First Island Chain. This will mark four major deployments sustained at once.
    • They also maintain two deployments to the Middle East and started a Northern Pacific deployment last week.
    • Why It Matters: China is demonstrating that it can run security operations while also affecting its geostrategic goals. The Northern Patrol allows them to come around the Second Island Chain in short order and cut off our resupply chains if they choose to take Taiwan by force. – J.V.

Low Intensity Conflict SITREP (Next 48 hours)

  • Great Lakes – Far-left environmental activists claimed responsibility for shutting down two valves in Line 5 along the Great Lakes Region. Line 5 is owned by the Canadian company Enbridge, which reimbursed US police $2.4m for surveilling and arresting protestors. Enbridge is building line 3 through Minnesota from Alberta to Wisconsin.


M.S. indicates analyst commentary from Mike Shelby

M.M. indicates analyst commentary from Max Morton

J.V.  indicates analyst commentary from Jared Vaughn

R.C. indicates analyst commentary from Robert Cook

H.B. indicates analyst commentary from Harrison Burge

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