OFFICE OF REPORTS AND ESTIMATES, CIA FAR EAST/PACIFIC BRANCH INTELLIGENCE HIGHLIGHTS NO. 26 WEEK OF 3 NOVEMBER - 9 NOVEMBER 1948

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CIA-RDP79-01090A000500010017-8
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S
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12
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December 12, 2016
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November 9, 2000
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17
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November 9, 1948
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Apy,roved elease 2001/0 &A F, 8/26 ~Fc C,\A .,n C a l t NeVV- / UFF1UJ5 OF R&FUR J.5 AND ESTIL RTES, CIA FAR EASTfACIFIC BRANCH -tow OP` V'- INTELLIGENCE IIGIILIGIITS NO. 28 VIE8K OF 3 NOVEMBER - 9 NOVEL'If3ER I"A SECTION I. SUMMARY OF PAR EAST TRENDS AND DEVEIAI . Substantial Improvement in the Japanese economic situation may be expected to result from a $220,000,000 trade agreement between lapan and "sterling area" countries (page S), The slow improvement in Japanese economic revival has resulted in a recommendation by several US agencies that the proposed Japanese monetary and banking reform be delayed (page 5)o Democratic-Liberal Party hopes for an early dissolution of the Diet are being frustrated (page 5) A movement for coalition with the North Korean regime may gather strength among South Koreans unless the US indicates some intention of retarding-the withdrawal of tactical troops (page 8)a The battle for Central China which will probably decide the fate of the Nationalist Army is now well under way (page 7). Frantic attempts of CRIARG Kai-shek and his followers to gain immediate U5 aid and reorganize his tottering cabinet probably heralds the political collapse of the Government (page 7), The conduct of the Chinese Communist in Mukden will probably be the proving ground for US-Chinese Communist relations (page 8). RAO Tse-tung reasserted the firmness of the USSR-Chinese Communist unity as the Communist radio warned all Nationalist Generals in North China to defeat or "follow CHIANG to the tomb" (page 8)o Meanwhile riots, fantastic prices and cessation of business in Shanghai and Nanking appeared to be forerunner of the virtual economic collapse of China (page 9 )o Burmese Communists are attempting to instigate communal warfare between Karens and Burmans (page ]LO). fO s in- suooee ng sect lone o this tree y, the fo marg na notations are used: (1) "A", "B", or "C" -importance, in B/1 Ess opinion, of the ,item, with "A" representing the most important ones, Approved For Rel A-RDP79-01090A000500010017-8 Approved Foi~elease 2001/08/26~ I DP79-010900500010017-8 SE StL PRY (oont d) The Phibulregime in Siam is exploiting fear of communist unrest to further its political objectives (pape,10), The now French High Comissioner has opti istio ideas concerning the PranooiVietaamese problem (pagell)e reach Minister Current discussions between the Netherlands settle- ment Premier may represent ment in Indonesia (page 11)0 The Australian Government has acted quickly to curb a threatened Communist-led coal strike (page12)e Approved For Release 200 RDP79-0109OA000500010017-8 Approved For Relbsge 2001/08/26: CIA-RDP79-01090A000010017-8 SECRET -3- SECTION II. DEVELOPdIGNTS IN SPECIFIED AREAS GENERAL Trade a went concluded with "sterlin area" despite, fearsof Japanese "unfairm rade taotios Despite a generally cautious attitude toward revival of trade with Japan, countries continue to effect trade arrangements. A 45500009000 ($220,000,000) agreement has been signed with Japan by the UK and colonies (except Hong Kong), Australia, India, New Zealand and South Afrca which should contribute to the stabilizing of the Japanese economy as will as the entire Far East. The agreement, covering the period from 1 July 1948 to 30 June 1949, represents an increase of Japan's trade with the whole "sterling area" of over three and one-half times. The main goods to be exported by Japan are cotton textiles which account for a minimum of g 16,000,000 of the L 27,000,000 of Japanese sales, industrial machinery. and parts, raw silk, rolling stock, caustic soda and other chemicals, rayon, wool and silk manufactures, paper and paper products, and bunker coal. The "sterling area" participants will furnish Japan with various goods worth about i 23,000,000, These will include raw wool, iron are, salt, raw cotton, cereals, petroleum, rubber, tin, jute, oil seeds, wool waste, coa1, hides and skins, manganese, gums, resins, and shipping. The balance, about to 4,500,000 will be offset against goods already delivered to Japan. Meanwhile, of course, sterling trade can continue between Japan and other countries in the "sterling area," e.g., Burma, Ceylon, and Iraq, under the provisions of the over- all sterling payments arrangement on a case-by-vase basis or through bilateral arrangements, e.g., Pakistan. The trade agreement will afford greater elasticity for Japan's trade in that it is a multilateral arrangement with important suppliers of Japan's needs in raw materials as well as traditional consumers of its products, It should be a tremendous boost to Japan's export level, which has been lagging seriously (See page ,S )o On the other hand, the favorable progress being made in attempts to effect Japanese trade arrangements is tempered by a cautious attitude on the part of the other countries. For example, the current trade negotia- tions between Japan and Egypt are being complicated because Egypt fears that the price of Japanese exported goods will be fixed arbitrarily and that Egypt's markets will be flooded with products at a price with which Egyptian industry cannot compete. In addition, UK has expressed concern that a Burmese trade delegation now in Tokyo may offer rice for consumer and capital goods; the UK is anxious that Burma continue to handle all Approved For Release 200`1/08 I q-DP79-01090A000500010017-8 Approved For Rel a 2001/08/26.: CIA-RDP79-0109OA00W0010017-8 SECRET M MM (continued) rice exports through the International Emergency Food Council. These fears of Egypt and the UK reflect a general desire that post- war trade in the Far East be controlled so that Japan cannot gain Its pre-war competitive advantages, Although considerable interest has been indicated by many countries in the revival of trade with Japan. its pro-mar "dumping" tactics are obviously not forgotten. Moreover, since Japan is the logical source of manufactured goods for the other 'Par Eastern countries, it would be relatively easy for Japan, in the absence of international controls to get a disproportionate share of rice frost the rice exporting countries through barter arrangements0 Approved For Release 200 0812X -RDP79-01090A000500010017-8 Approved ForIease 2001/08/26: CIA- DP79-01090500010017-8 SECRET s d la Ja an blaklag reform 09IMr- ind atip f "B" Jaoaneae eoonomic rec___ o . The Departments of State, Army and Treasury and the Federal Reserve Board have expressed their concern that the pro- posed Japanese monetary and central banking reforms would be jeopardized if introduced in the present inflationary period before other fundamental measures are taken to stabilize the Japanese economy., Their view is that the establishment of these reforms should be an integral part of a coordi- nated stabilization program and should be introduced only after the success of that program is reasonably assured. The recommendation of the several Departments reflects the continued uncertainties in Japanese economic recovery. Already, the official five- year plan has been advanced one year, largely manifesting a slower im- provement in Japanese exports than at first anticipated. The rate of recovery can be expected to be further decelerated by the out in allot- ment of funds for "operation Crank-up", currently estimated at approxi- mately $73,946,000 for the fiscal year 1949. This is about one-half of the amount originally requested of the US Congress for that purpose. As a result, estimates of imports. which Japan must make in order to increase production for export have also had to be scaled down QW dissolution nos dime Democratic-Liberal Party (D-L) hopes "B" for an early dissolution of the Diet are being frustrated by: (1) apparent SCAP insistence on revision of the National Public Service Law (NPSL) in the present extraordinary session and (2) delaying tactics by opposition parties who command the majority. Premier Toshida&s Democratic-Liberals realize that the holding of early elections will enable them to capitalize on popular disgust with the parties of the previous coalition governments. Moreover,, early elections offer. prospects for achieving single party control of the government. Under the Japanese Constitution it is incumbent on the Diet to revise the NPSL to replace the interim cabinet ordinance issued to implement SCAPAS "suggestion" of 23 July for the restriction of government workers' rights. The D-L realizes that introduction of the proposed revisions in the Diet would hurt its election prospects. Socialist objections to certain of the proposals and opposition disagreement generally with the D-L program will probably provoke considerable controversy and delay. It would seem however, that SCAB' views with disfavor a situation where the draft revisions might become an election issue and will insist on early passage of acceptable legislation. The opposition parties have little to unite them at present besides Approved For Release 2001S/226 : CTA=RDP79-01090A000500010017-8 Approved For Rise 2001/08/26 CIA-) 9-01090Ai 500010017-8 7EC (Cunt,) their mutual interest in confounding Yoshidals program The opposition's ability to use their Diet majority to frustrate D-L plans is well illus- trated by the passage of a 21-day extension of the present Diet session over the opposition of D-L members who sought a much shorter extension. A;eeegt for ecia i, fh the -North go, ream r "Ua .ltrgr -im among South Koreans, unless the US indicates some intention of retarding the withdrawal of tactical troops. Iany South Koreans fear that eventual Communist domination is inevitable in view of: (a) continued threats and rumors of an invasion by superior forces from North Korea following US troop withdrawal; (b) visible evidence of the imminent completion of that withdrawal; (c) the apparent inability of the Rhee government to improve the, people's livelihood; and (d) the recently-demonstrated inefficiency of their own security forces due to insufficient training, This attitude, if it becomes general, will provide a fertile ground for exploitation by both the rightist followers of Kim Koo who want "unity of North and South beyond any other consideration, and the Communists who hope for a bloodless coup to units all Korea under their domination. In an attempt to prevent the spread of defeatism and to guarantee the survival of his governments President Mae has requested the United States to postpone troop withdrawal until the Constabulary is better trained and until an additional internal security.force of 50,400 "National Guardsmen" are trained and a ipped by the United States. In addition to further training, the Constabulary will require additional screening to eliminate infilitrated Communists and rightist elements loyal to Kim Koo before the South Koreans will develop much faith in its capabilities. Approved For Release 2001/08/26 : CiA- 9-01090A000500010017-8 Approved For Vase 2001/08/26 : CIA-RDP79-01090vi 500010017-8 CHINA SECRET Decisive battle for Central Chine. has begun. Jumping off from their bases in south Shantung and east lionan, at least 16 Communist columns are. sweeping down on both sides of Hsuchou in a pincer operation designed either to isolate that vital Nationalist base and destroy the last major obstacle to a Communist advance on Nanking or, bypass liauchou and drive directly on Wanking. In either eventuality, little hope can be entertained that the Nationalist units in the area, being for the most part poor troops lackin= the will to fi?ht, will be able to withstand the coordinated Communist drive which combines the forces of CHF:N Ti, LID Po.cheng, and CHEN Keng. Late reports, as yet unconfirmed, state that the Communists have already occupied Hsuchou, perhaps in the wake of a hasty Nationalist evacuation.. At this late date, the collapse of Nationalist defenses in this area might well mark the end of organized Nationalist military resistance. At present there is a lull in Communist activity in North China. In view of the general weakness of the Nationalists in the Peiping-Tientain?.Italgan areas and the likelihood that FU Tso-?yi will not stay and defend this sector, an early Communist occupation would appear quite simple? FU, in all likelihood, will attempt to return to his old stamping grounds in Suiyuan, but late Communist incursions into the province will make such a move on the part of PU extremely difficult. At present the Nationalist evacuations of Yingkou and Hulutao are completed, and the Communists claim that the port of Shanhaikuan has been occupied, thus completing the Nationalist eclipse in Manchuria. The National Government is struggling to avert political collapse. Military disasters, failure of the economic reform measures, evacuation of Americans from the NNanking-Shanghai area, and the Republican defeat in US national elections are major factors in the current upheaval, A cabinet crisis was publicized when Prime Minister WONG 1 en-hao submitted his resignation on 3 November:, Governor T.V. SOOPIG of Kwangtung, Gen. HO Ying?.chin., and former Prime Minister CHANG Chun have thus far declined to serve, A satisfactory solution of. the cabinet problem is improbable, even though WONG Won-4hao has been prevailed upon to remain a few days longer. CHIANG Kai-shek has held consultations with CHANG Chih-chiming, SHAD Li-tze, and Foreign Minister WANG Shih-chieh, who have advocated a peace settlement with the Commmsunists. However, the Generalissimo's most recent statement suggests his continued reliance on personal followers, chiefly of the rightist groups of the Kuomintang, i.e., CC Clique,._ and his decision to attempt further resistance against the Conmranists, Approved For Release 200 CIA-RDP79-01090A000500010017-8 Approved For R se 2001/08/26 : CIA-RDP79-01090A0D0 00010017-8 SECRET p. gate attempts to obtain US aid are being made by certain "C" right-wing, Olements in the National Governments These officials including CHIANG Kai-shek, as well as some pro-Government newspapers, are taking the line that Chine. is the outpost of the Third World War, and the Chinese civil war is not merely the suppression of an internal revolt but a national war against the forces of Soviet Communism? Further efforts to force the US to render greater aid are reflected in the present attitude of the Legislative Yuan Foreign Affairs Committee which holds that the US is largely responsible for China's plight because of the Yalta Agreement, mediation efforts and insufficient aid, and, therefore, US military aid to the Nationalists is an obligation? Mukden, roving ground for Chinese Communist attitude toward US,, The orderly and efficient Communist takeover of tru aen has favorably impressed diplomatic officials there and has won the Com- munists wholehearted support from the populace, Thus far US consular property has in large been treated with deference and the Communists have apparently welcomed the decision of consular officials to remain in Mukden,, However, the hand of the USSR is already apparent, Soviet trade representatives were present at a meeting of US,,British,, and French. Consuls with the new Communist mayor of the city; and Soviet railway workers who left during the Nationalist occupation of Muukden are returning to the city where they will now be able to operate effectively. There is some indication that all foreign consular activities will be closely observed and probably hampered by the Comnmunists. While '!the extremely correct attitude of the Communist, may be merely intended to impress the foreig ersx, it is possible that the Chinese Communists hope to win the sympathy of the Western Powers in order to pave the way for international recognition and eventually to counterbalance the Soviet influence. At any rate it is an exceptional opportunity for the US to test its ability to operate with a Chinese Communist regime. Communists meal to Nationalist generals to defect. The Chinese Communist radio has warned all Nationalist generals in North China to come over to the Communist side immediately or follow CHIANG Kai-shek to "the People?s Court and to the tomb." Though aimed at higher- officials and couched in pore threatening terms, this is a further appeal for defection, a device which has already proven successful in the campaigns in Shantung and Manchuria and will probably succeed in other areas of China. MAO Tzeatun r resnffirms Chinese Communist unit * with the USSR. .0 Tzeptung, Clus,irmar af the Central Committee of the Communistn Party of China., and elected in 1935 to the Executive Committee of the Approved For Release 2001/0 6 : A-RDP79-01090A000500010017-8 woo Approved For Rase 2001/08/26 : CIA-RDP79-01090A500010017-8 SECRET Communist International, has reaffirmed Chinese Communist unity with the USSR in an article for a Soviet magazine. LIAO writes that events have confirmed Stalin's 1918 statement that the Soviet October Revolution of-1917 `builds a bridge between the socialist -vest and the enslave4i Fast, establishing a new revolutionary front against imperialism," and that events have further "proved the utter hypocrisy and bankruptcy" of those who seek a "middle road" between "imperialism and the Soviet Union." MAO writes-that the revolution must every-- where be conducted by a "Lenin-Stalin type of revolutionary party," and that "the Communist -'arty of China ...was established and developed with the Communist Party of the Soviet Union as a model." MAO recommends that "all revolutionary for-ces...organize an anti-imperialist front headed br the Soviet [ion," in order to hasten the disintegration. of the "rotten' but still strong forces headed by "American imperialism and its running dogs." The above are the most aggressively pro-Soviet remarks which have been publicly attributed to Win recent years, and, if accepted without reservation, discredit reports that MAO leads that portion of the Chinese Communist Party which seeks to avcid subservience to the USSR. While it is highly probable that the Chinese Cormmuiists and the USSR will present a common front at least until a Communist- dominated government for all China comes to power, it remains possible that, after that time, perhaps in regard to Soviet attempts to annex Manchuria or to purge the Chinese Communist leaderships. a schism will develop which would be to the possible advantage of the United States0 Riots, fantastic prices and cessation of business in Shanghai and Nanking characterize the near panic resulting from Nationalist military reverses and the Communist threat to the Yangtze Valley. In Shanghai the price of rice has risen to GY $1,800 per picul of 170 pounds, representing an increase of 80 times over the ceiling price prevailing last week. The continued refusal of farmers to ship food to the cities for any price has heightened the critical food shortage in both cities. The universal reluctance to accept gold yuan clearly indicates. that the National Government has lost complete control over the financial situation. Therefore, it is probable that the National Government, in recognition of its bankruptcy. will soon lift foreign exchange controls and-permit free dealing in US currency and bullion. Approved For Release 20011 / T: trg-"PDP79-0109OA000500010017-8 Approved For fWease 2001/08/26 : CIA-RDP79-01090500010017-8 SECRET C anmunists exploiting tense Karen-Burman relations. Burmese Communists "A" are apparently tr3-ing to improve their posit En de berately attempting to instigate communal warfare between Karens and Burmans. They are known to have led attacks upon the Karens who in some cases have retaliated. They have also encouraged, with some success, the rebellious elements of the Peoples' Volunteer Organization to join with them against the Karens. Simi- larly, the Socialists seem to be exploiting the anti-Karen sentiment pre+r- a].ent among Burrnans as a means of strengthening their domination of the Government. Meanwhile, the ?regional Autonomy Com ittee, appointed by Prime 'sinister Thakin Tulwhich is supposed to be investigating the talidity_of the claims of the ethnic minority groups, has done ]4ttle to relieve the tension. The Karen National Union (KNU), the most important Karen political organ- ization, blames the Communists rather than the Government for the recent provocations, but is becoming increasingly irritated with the Government's failure to give the Karens adequate protection. Under present conditions it is doubtful that Karen leaders will be able to restrain their followers much longer. The KNU has now appointed a seven-man Action Committee and Karens are stopped and the Burmese Government takes positive steps to settle the Karen problem in the very near future, it is quite likely that the Karens will resort to a general armed uprising and will attempt to establish an independent state. Such a rebellion would be an extremely ferocious and bloody affair in which the Karens would probably receive acme active support from other ethnic minorities. etter armed and organized than ever before. Unless the attacks upon the the Karens are SIAM' Communist apprehension loited to further Political objectives. The "B" .., Phib ree,wb a Exhibiting some genuine apprehension that Communist- instigateunrest may also develop in Siam,is exploiting this fear to dis- credit the political activities of opposition groups. The nhibul regime,. for example, has arrested not only awry officers implicated in a recent abortive coup deetat, but has also detained many Free Thai supporters of the principle opposition leader, self-exiled Elder statesman Pridi, current- ly villified as a Communist conspiring to overthrow the present government. ostensibly in preparation for rumourecs unrest, the Siamese Government has requested military assistance from the TTY, . and the US. A "frontier peace and maintenance commission", headed by Premier Phihul Songgram, has also been formed. The new military organization, composed of six sub-committees, is expected to take the form. of a national civilian force organized along the lines of the British Territorial 'orces. If.the program is implemented, the Approved For Release 6 : -RDP79-01090A000500010017-8 Approved For Rase 2001/08/26: CIA-RDP79-01090ANJOS00010017-8 SECRET ST`_. (continued) first group of recruits should be ready for duty early next year. Although the political objectives of the Phibul regime are apparent,the Siamese armed forces, nevertheless, would be hard pressed to carry out effective suppressive measures in the event that.externally organized disturbances arise in Siam. TI OCHITIA New French H Commissioner's opinion on Franco-Vietnamese rroblem. "B" In a conversation with ITS Ambassador C fery Paris, the new -Fr Hih gh Commissioner for Indochina, Lion Pignon, stated that the real extent of former Annamite emperor BaO Dai's support could not be determined until Bao Dai has returned to Indochina. Should Bao Dai be given an agreement in principle backed by adequate implementation, however, Pignon believes that the former emperor could obtain popular support and eventt- lly cause defection of a large number of the non-Communist nationalists who support Ho Chi 1.ah and the Viet *.iinh. As for ratification of the 5 June Franco-Vietnamese Agreement, the new I?igh Commissioner feels that this is not the appropriate time for such action. Instead, he believes that the French Government should present the Assembly with both a definite Indochina policy and an agreement made with Rao Dao, after Which he expects positive approval and the necessary legisla- tion for implementing the agreement to follow. Although Pignon'a optimistic opinions and plans have same merit, the new High Commissioner has apparently failed to realize that the old question of Rao Dai's ability to form a government of truly nationalist, capable and determined personalities, able to attract popular support, still remains. Even more important, it is not likely that Bao Dai will reach an agreement with the French Government prior to Assembly action. The problem, therefore, remains basically unchanged and Bao Dai's return as head of a Vietnam state will depend upon prompt and liberal implementation of the June agreement by the French Government. DIIDnTT,TA Last Chance? Discussions being held currently bete aen Netherlands "A" Foreign Imo. ' sr`t;"sr~ Stikker and Republican Premier Matta may represent a last chance to reach a negotiated settlement in Indonesia. C ontiiderable progress was made in initial talks on 4 November when both sides seemed willing to adjust their former positions. Stikker'e colleagues in Batavia, however, appear to feel that his attitude toward the Republic is far too generous. If Stikker receives sufficient support from The Hague he may be able to override the more unconciliatory policy of certain officials in Batavia, in- cluding High Commissioner Peel and Commanding General Spoor. Approved For Release 2 Approved Fdlease 2001/08/26 : CIA-RDP79-01000500010017-8 SECRET M N IA, (continued) Any agreement resulting from the Ratta-St &er talks would presumably be referred to the UN Good Offices Committee ((rc) in order that final settlement might be reached within that body. Merle Cochran, US Delegate to the GM, regards these conversations as a useful preliminary measure for bringing the parties together in final rM negotiations, and has used every possible means to insure a congenial atmosphere for the talks. The divided nature of Dutch policy on Indonesia has become. more apparent in recent weeks. ';bile the Stikker-iatta talks offer an ekxamn3.e of Dutch good will toward the nepublic, Dutch propaganda efforts regards.:.- Republican truce violations give the impression that they are preparing to initiate police action. AL.1GTRALIA Government acts to curb threatened Communist-led coal strike. "B" The New Sou "'ales Government has moved tly to curb a Communist- ed work stoppage in the Australian coal fields by ordering the men back to work. The strike, ostensibly a jurisdictional dispute between the Australian 'markers Union and the ?liners Federation, a Communist-dominated union, developed over a disagreement on whether the men should out a tunnel as members of the Union or the Federation. For the first time the Labor Government has indicated a willingness to grapple with the situation by sharply criticising the action of the miners and strong>ry supporting the position taken by the State Government in order- ing the miners back to work under a compulsory arbitration scheme. The Cabinet is also reported to be preparing emergency legislation should the miners defy the NSW Government order. A prolonged coal strike at this time would not only have a dangerous effect upon the Australian economy but would also seriously threaten the political future of the Australian Labor Party. The strong position taken by the Government in the current dispute indicates an awareness of both dangers and may lead to further action by the Labor Government to curtail C oam unist influence in Australian industry. Approved For Release 20 1/0 : C K-LDP79-01090A000500010017-8