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

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-01090A000500010017-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 12
• Document Creation Date: December 12, 2016
• Document Release Date: November 9, 2000
• Sequence Number: 17
• Publication Date: November 9, 1948
• Content Type: PERRPT

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FAR EASTfACIFIC BRANCH
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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,
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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
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-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
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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
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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
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(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.
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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,
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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
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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.
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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
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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.
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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.
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