Good morning, and welcome to the Global Situation Report for Friday, 12 January 2024.
- BASS: CHINA LACKS FIREPOWER TO DEAL WITH ECONOMIC WOES: Hedge fund manager Kyle Bass of Hayman Capital said this week that China doesn’t have the financial firepower to deal with its troubled economy, but the country will soon direct its increasing military firepower against Taiwan.
- China has an incredible amount of leverage in its economy, especially in its banking system, with banking assets three times higher than its Gross Domestic Product (GDP), according to Bass.
- “I don’t think the political zone is how China’s going to win this battle [against Taiwan]. I think unfortunately post-[Taiwanese] election, all bets are off when China decides to… take Taiwan over,” Bass emphasized.
Why It Matters: Bass is correct that China is in a “precarious place” today. Youth unemployment is over 20%, and the property sector that’s fueled growth for decades is now in dire straits. These economic conditions make a volatile mix, which could cause financial distress for Western companies and banks with too much exposure to China. Also, China’s economic troubles increase the likelihood of a Taiwanese invasion, as leaders hope for a distraction and a “rally around the flag” moment. – H.B.
- DC BOLSTERS RELATIONS WITH CHINA BEFORE TAIWAN ELECTION: U.S. Secretary of State Antony Blinken is meeting with Liu Jianchao, head of the International Department of the Chinese Communist Party, in Washington.
- Commerce Secretary Gina Raimondo had a call with her Chinese counterpart yesterday.
Why It Matters: Washington is making efforts to improve communications with China ahead of a contentious election in Taiwan. A win by the Democratic Progressive Party (DPP) and strong language pointed toward Taiwanese independence could spur Chinese President Xi Jinping to order military action, such as a naval blockade of the island. – J.V.
- CONSTELLATION FRIGATE DELAYED, SHIPBUILDING IS NOT GETTING FIXED: Andy Bosak, the deputy manager for the Constellation-class frigate program, announced a “potential schedule slippage” during the annual Navy Surface Warfare Symposium yesterday.
- The frigate delivery is being pushed back to 2027 due to workforce shortages in the Wisconsin shipyard.
- Mark Vandroff, Fincantieri Marinette Marine’s chief executive officer, said that his shipyard can produce a maximum of two frigates per year. He told the Navy to fund another shipyard for him if they wanted more.
Why It Matters: The Navy is failing to deliver on a 17-year-old design. The ship’s original designer, Fincantieri in Italy, managed to get frigates from “laid” to “launched” in about 2.5 years. The shipyard struggles to find people to build the ships, and the Secretary of the U.S. Navy is ordering another ineffectual report that will likely be produced well after he is out of office. Meanwhile, the Navy has not had a frigate in nine years. The frigate is a critical part of any surface action group’s close-in combat plans, but we have now gone half of a career without training these ships and crews into the force. There will not be any effective frigate in service in time for any timeline of a war with China. – J.V.
- ALLIED STRIKES ON HOUTHIS IN YEMEN: American and Allied forces struck numerous Houthi locations with airborne, ship-based, and sub-launched weapons.
- Dutch, Bahraini, Australian, and Canadian forces supported the attack while British and American forces conducted them.
- Abdel-Malek al-Houthi, leader of the Houthi rebels, promised a response prior to the attacks.
Why It Matters: Until the Navy’s point defense lasers are fielded, the Houthis have the upper hand on the cost exchange ratio, where their attacks are thwarted by far more expensive weapons. Western and allied forces cannot sustainably fight the Houthis while funding Ukraine and Israel, and rebuilding war stocks for a potential fight in the Pacific. The Houthis have promised a response numerous times, so this is likely to escalate into a proper shooting war in the Red Sea. The complex swarm attack we saw earlier this week is the most likely action the Houthis will take. The U.S. continuously trains against these types of attacks. However, swarm attacks are highly effective as the Houthis only need a single boat to get past the defenses in order to score a mission kill, and small boats are untargetable by the Navy’s most accurate weapons. – J.V.
The Biden administration is caught between a rock and a hard place. If there is no response to Houthi attacks that are driving commercial shipping out of the Red Sea, the U.S. effectively loses control of the global commons, a requirement for hegemonic power. Biden also risks getting the U.S. drawn into another Middle East quagmire if airstrikes do not deter the Houthis from continuing what amounts to a blockade of the Red Sea and Suez Canal. The U.S. could get drawn into a longer military action and possibly an invasion and occupation of Yemen, as the Houthis have already said they will continue launching strikes against ships in the Red Sea. – R.C.
THAT’S A WRAP: This does it for today’s edition. Thank you for reading. If you know folks who would also like to receive this email, would you please forward it to them? We appreciate you spreading the word. – M.S.