Intelligence Highlights No. 15 WEEK OF 17 AUGUST - 23 AUGUST 1948

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-01082A000100010006-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 12
• Document Creation Date: December 12, 2016
• Document Release Date: May 23, 2001
• Sequence Number: 6
• Publication Date: August 23, 1948
• Content Type: PERRPT

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CLASS.-3-`_
c~E FT 1'.] DECLASSIFIED
CLASS. CHANGED To: IS
S
NEXT REVIEW DATE:
RUTH: HR 70-
DATE j ~ W . REVIEWER: 372044
OFFICE OF REPORTS AND ESTIUAT.ES, CIA
FAR EAST) ACIFXC BRANCH
INTELLIGENCE HIGHLIGHTS woo i8
WK' OF ? 17? AUGUS T? - - 23, AUGUST - 1948
SECTION I, S=MY OF FAR EAST MENDS AND DEVEWPM8N1S
New moves to stimulate trade betaaeen Japan and the sterling area will
play a significant role in Japanese economic recovery (page $)? The British
c re diet =bed bit the Japanese Implementation of SOAP'S "suggos .'. ,tea regard-
ing the rights of government employees (page 4) o
The successful conduct of the US-Korean negotiations is being ends eyed;
at the same time, however, a blow is being dealt to the North rorean "Unity"
program (page 4).
Nationalist leaders in North China still do not appear ready for an
open break with Nanking (page 6)e However, the National Government is con-
fronted by growing civil unrest throughout China (page 6). In an attempt to
restore financial stability, the Government has introduced a new currency
(page
6).
The widening rift in Indonesia between the Netherlands Goverment and
the Republic is now expected to lead to the most serious crisis for the UN
Good Offices Committee since the signing of the 17 January 1948 Renville
Agreement (rage 9) .
The reaction-in Indochina to the French Assembly action on the Franoo-
Vietnam+eso 5 June,, agreement is increasingly hostile (page 9)e
The insurrection in Burma is expected to create serious economic
difficulties (page 10),
Planters and miners in Malaya estimate thc.t four divisions will be re-
uired if law and order is restored ) .
z n succeeding see ens o this I ekly, the o owing margins
notations are useds
(1)
(2)
(3)
Double asterisk (**) -placed at beginning and end of infor-
mation based solely on "S/S distribution" series.
Single asterisk (*) -to flag item containing "S/8 distribution"
series,
"A", "B", or "C" --importance, In Bf'E?s opinion, of the item,
with "A" representing the most important ones*
State Dept. deal,,,i~iqafiPAAe~~ 8~YCD~0~~0010006-3
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S RY (continued)
The surprise Now Zealand currency appreciation move is receiving soma
protest in New Zealand and is being sharply criticised in Australia (page 11)a
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S.CTI0N II. DEVELOPMENTS IN SPECIFIED AREAS
GENERAL
New moves to stimulate trade between Japan and the sterlinCarea "Be
A further stimulus to trade between Japan and the sterling area inaf be
expected from a decision by SCAP to place sale of Japanese cotton textiles
to sterling area purchasers on a 100 percent sterling basis. Since cotton
textiles are perhaps the ot)ief item the sterling area wishes to import from
Jc.pan, their omission from the original over-all payments arrangerrwnts of
31 day 1948, which placed all other Japan-sterling area trade on a sterling
basis had been felt to be a major hindrance to the development of that trade.
Discussions are also taking place on the possibility of a sterling loan
by the UK to Japan. Inasmuch as the over-all payments arrangements provide
that the surplus of eterlibg either way is convertible into dollars, a ster-
ling loan would obviously enable Japan to import more from the sterling area
than the sterling area would import from Japan, without Japan having to delve
into its scarce dollars. :leanwhile, a trade plan is reported to have already
been drafted, which will involve reciprocal trade between Japan and the ster-
ling area worth about $242,000,000 during the one year period that began
I July 1948.
These latest developsHnts in the facilitation of Japan-sterling area
trade emphasise the reoogn:Ition by the UK.and other sterling area countries
of Japan's important posit.'.on in world trade and will, play a significant role
in Japanese economic recov3ry. Despite frequent manifestations of political
hostility to Japan, they -L3ant Japan's cotton textiles, raw silk, dried fruits,
machinery, bicycles. paper, pottery, glassware and drugs; in return they can
offer Japan salt, iron oru, crude rubber, wool, tin, sago flour, coconut oil,
and industrial chemicals?
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CT I"DL`T
JAPAN
Jam _ sherds to be pe r2itted S re air forei&m ess , Japanese
shipyards will be allowed to undertake general repairs and conversion of
foreign vessels, according to reports; hitherto, SCAP has restricted work
on foreign vessels in Japanese shipyards to emergency repairs,
This permission should result in full resumption of activity in Japanese
shipyards, a large part of which has been idle since the surrender due to
lack of raw materials,, Japanese shipyard labor will thus be kept occupied
an6 will not drift to other means of employment. As a result, Japan, a
ma' : ',time nation, will not face a shortage of skilled shipyard laL. )r when
materials become available for such shipbuilding as Japan may be a.ilow3d
under any post-war settlement,
ti; h r, Mel ze Jaa nese r s ptign o a vernMent eqn eae rust m The HS
British Embassy in Washington has passed to the State Department the
criticism of the Japanese Government ordinance regarding the rights of
public employees issued in response to the suggestions embodied in. SCAP's
letter of July 23a The UK believes that the Japanese Government went
beyond these suggestions in denying industrial workers on government-
operated railways and in the salt., camphor, and tobacco monopolies the
right to strike and to bargain collectively. Criticism that Japanese
government action conflicts with the spirit of FEC directives could be
avoided., according to the Ulf, by SCAP insistence on Japanese compliance
with his suggestion that such categories of workers might well be excepted
from the regular civil service. Although the UK does not object to regu-
lar civil servants being deprived of the right to strike, it considers
the right of petition to which they are presently limited inadequate and
cites the smooth function of the UK system wherein civil servants possess
the right, to organize and bargain coupled with the right of appeal to
some form of arbitration tribunal,
In making these representations in Washington rather than Tokyo, the
British avoid the embarrassment of appearing to side with the .Soviets
whose representative to the Allied Council for Japan, in demanding the
recall of SGAPOs letter, has accused SOAP of breaching FEC directives
regarding labor.
gs*ssc aid en con,, JS-K?resnn?otatnn~ eradg
US Korean negotiations leading to liquidation of US Military Goverment
have been threatened by leaks of confidential information on the part of
Korean negotiators to American newsmen and by the desire of Korean states-
men to exercise complete and independent control of their destinies while
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Kt ..A (Conto )
obtaining the maxdmum in American economic and military aid. At the same
time, a mayor blow to the eunitylprogram of the North lore= People's
Government has been the refusal of several well known South Korean liberals
and leftists to return to Pyongyang to support or accept posts in the gov-
ernment to be established following the 25 August elections,
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Y% T~mm
Nationalist northern leaders realize time is 01 o fir a brgak *Bit
with the Nanking government. The reasons for this realization appear to bee
1) All overtures of the northern leaders (ic. Fu Tso..yi in north China, Wei
Li-huang in Manchuria, and Wong Yao-vu in Shantung) to foreign governments
and the US for the purchase of arms and equipment have proven fruitless.
Sweden refuses to sell to the National Government in fear of Soviet retalia
Lion. Belgium is willing to sell if the Generalissimo bestows his blessings
or the negotiations. Chiangas sanction has not been received to date despite
hLi previous promises of condonement. 2) These Nationalist leadeie are
confident of a Republican victory in the conning US elections with a resultant
greatly expanded US military and economic aid program for China. 3) They
also feel that so long as Chiang continues as the recognized head of the
government all US aid will be funneled through Nanking. Consequently they
appear to have decided to string along with Chiang for the present in hopes
off' obtaining a slice of the much needed aid melor_ for North China.
DA11 unmet Is, Jncreasin&in Xat on al C3-isha. Workers at the eB"
Fushun coal mines in Manchuria have stopped work in protest over their economic
difficulties; the refugee problem in Peiping hussy produce serious consequences;
and large-scale arrests of alleged Communists, particularly students, are
underway in all major cities as a result of a recent order of the. Executive
Yuan. In an effort to curb civil disorder the J'xecutive Yuan issued an order
aimed at eliminating from Nationalist areas the Communist subversive elements
which the Government blames for instigating disturbances. Among the new
restrictions is the authority to search residences without a warrant. Chiang
Kai-shek appears to be resorting to even more dictatorial methods than those
which already have drawn the loudest complaints from anti-Government factions.
Such severe restrictions will only Increase unrest and the situation will not
be alleviated until the basic causes of dissatisfaction are removed.
Generf.,l q&iej geyal,ed ox the Chinese Civil War front last vreeA with WC"
no large scale actions underway. In North China the attempt of at least
two Communist columns under Nish Tung-chen to recross the Peiping-Sniyuan
Railroad below Nankou to established Communist bases along the Hopeh-Shansi-
Chahar border is being countered by the movement of elements of Fu Tso-yiOs
forces from Eastern Ropeh. These forces recently undertook to drive the
Communists from the area north of the Kailen coal fields, and if Pu can keep
the Communists from their bases certain observers feel that he will have
succeeded in neutralizing their effectiveness. This would represent a signal
victory for ft. Elsewhere, the Communist encirclement$ of Taiyuan and Teinan
were loosened, but raids on isolated Changchun continued unabated.
The chances that Chinans new curren_ w'ill x)rove successful in producing "Ae
4RMtfTOOO_
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relative financial stability for a reasonable length of time, depend largely
on (a) the effectiveness with which the Government can initiate the accom-
panying economic reforms, and (b) the degree of public confidence in the
venture. Assuming favorable conditions in both these respects, the initial
period of "stability" following the issuance of the new currency would contain
certain self-perpetuating aspects that could be capitalised by the Govern-
ment. An Increased flow of commodities on the market could initially be ex-
pected from: (1) the reversal of the preceding flight from currency to com-
modities and (2) the marketing of the fall harvest. It in this situation
Government receipts could be increased to projected levels (i.e. 70 percent
of expenditures) and NCA resources used toward financing the residual deficit,
the inflationary impact of the government's fiscal operations would be dras-
tically reduced and stability prolonged. At the same time, a more realistic
exchange rate could be expected to increase official receipts from exports
and inward remittances and thereby reduce China's deficit on international
amount.
It appears clear, therefore, that the Government's ability to restrict
its budgetary deficit to manageable proportions represents the crucial
determinant to the success of the new program.. In assessing the Government's
prospects, however, some pessimism is warranted both because the new program
presupposes an improvement in real revenues of two to three times the existing
level, and because of the Government's conspicuous ineffectiveness in imple-
menting similar reforms during the past two years.
In any event, however, issuance of the now currency at this time repre-
sents a major gamble. Its success will have to be effected despite the
burden of civil war requirements and despite widespread scepticism in Chinese
financial circles as evidenced in the Shanghai press regarding the Govern-
ment's ability to meet these requirements without resort to inflation, its
failure would eliminate for all practicable purposes a last ditch measure
previously available for prolonging the National Government's survival.
Former Premier CbMa Chun is I'isitina uan, allegedly in a private "a"
capacity but undoubtedly to make a complete survey of the Japanese situation`
especially as it relates to China. A graduate of Toro Military Academy,
Gen. Chang, who has many important Japanese friends, may attempt to promote
a Sino-Japanese policy of friendly co-existence and a common front against
Communism. Gen. MacArthur has welcomed him. The State Department has
instructed the Acting US Political Adviser in Tokyo to accord special con-
sideration ?
and every facility to Can, Chang and his party so that he may
become thoroughly informed of our efforts in Japan in view of the influence
his opinions will have upon the Chinese attitude toward our occupation
policy in that country.
Al lg2 m streatment ne1e by Iwm ara:tion SgLUJ_q _11 being
played up by Soviet personnel in Shanghai, who are attempting to start a
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whispering campaign on the subject among normally proud Chinese. (This was
the lame which precipitated a large-scale boycott of US goods in China
early in the century, and the Soviets may have it in mind in their present
attempts).
The use C i ee e d g2EtI3, which has
been strongly opposed by Chinese shipping and other interests, is the subject
of new instractione by the State Dept. to the US Rmbassy at Nanking. The
Department feels that the fact most maritime nations are more liberal than
is China on the use of such waterways for (among other reasons) motives of
er,)nomic self-interest, should be helpful to the Embassy in disctubing the
question with the Chinese Government and In counteracting press attacks.
The Shanghai Markets US $ phange (Sellia a) Wholesale Price of Rice
Offs cta1 "20 0" 31ackmarket 2gr 172 This week (17 Aug 48) CN $480,000 CN $11,700,000 CN 65,000,000
Week ago (12 Aug 48) 480,000 10,500,000 49,500x000
Month ago (17 Jul 48) 480,000 5,800.000 30,000,000
Tear ago (17 Aug 47) 12,000 41,000 410.000
ET
"C"
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pWq. Uk Gt?C cr s q , cne fed-The irldening rift between the X e
therr-- WA
trLd Government and the republic is now o;tvected to lead to the most serious
r eie for the UK Good Offices Committee (GOC) since the signing of the 17
.eti?auwr,r 1,948 Renville Agreement. The Netherlands Government on 22 August
submitted to the Bandoeng Conference (a moating of delegates from non-
iftili,}ia cen. areas) a draft plan for the vropoaed administration of Indonesia
t : the United States sf Indonesia (USI)is formed. The US Delegation of
'ia ; GOC( US GaO) axpre3sed concern to Dutch officials in Batavia when
lk rned of the method of nroeedure the Netherlands Government intended
=.t?= sn rsue inasmuch as they had made no pr(-vision for informing the Republic.
tindor the Renville Agreement., thr- Republic; is to have a place in the pro-
visional federal government and later in he USI. Under these ciro instances
US GOC feels that the Republic., after a shouted reaction, may protest to the
UV Security Council that the butch have violated the Agreement by failing
to consult the Republic regarding future administration in Indonesia.
In any event it can be expected that moderate Republican leaders will
have Treater difficulty in retaining the support of steadily growing; leftist
groups. So_..e of the more extreme groi ps in the Republic have already advocated
further negotiations with the Dutch orly on the basis of full Republican sov-
Lei ~rnty
.
..'Qnch lsebl :: ?~ann,xl~`r -p'ps ~Inel~~. ~R'?
The French Assembly on 19 August vcte?i 347-183 to postpone indefinitely the
debate on the Indochinese question.. r'iich the French Government now maintains
is indirect approval of the 5 June Franco-Vietnamese Agreement. Prcmier
i~aarie, in his statement to the its:xeribly on the Governmsnte s policy, paid
tribute to the work of French Hi;rh Commissioner Bo?laert and transferred the
responsibility for changing the status of Cochinchina (still a French colony)
from approval by the French A.a>sembly to a referendum by the population of
that state. Marie concluded '7 expressing the hope that the creation of a
permanent government may be rendered possible as soon as circumstances shall
permit."
Reaction in Saigon to the rch'iissembly' s action is increasingly
hostile. An influential member of the French High Commissariet has stated
that the present situation prevents :any real implementation of the agree
Went as regards Cac inchina, thugs making it impossible to turn, over the
administration of courts and jvotice to the Central Vietnam Government,,
President Xuan has cabled ParI~{ asking for clarification of the status con--
templ?ated for Cochinchina and its relationship to his central government,
in addition, an influential. V4.etnammese editor, vlho publishes in the French-
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~?eeeA%rr
INDOMNik continued
controlled area, characterizes Llarie's. statement as "a triumph of diplomatic
slipperiness," and ramps that the delay win make the final solution no
easier and has already deterred many nationalists from supporting the Xuan
regime.
BOMA
In retr,on expected to er ado efi_o e o .S Sul Although "B"
the Burmese Government appears to have recovered somewhat from the initial
shock of its latest insurrection, the situation remains serious. Now army
an-1 police botallions are being hastily organized, and the Burmese Govern-
ment has app-.?oached the US and UK for large quantities of military supplies.
There are indications also that the Government is depending upon the various
ethnic minority groups, po+.rticularly the warlike Kachins, to supply much of
the necessary manpower. Although the Government's position continues uncer-
tain and v. sustained and determined effort is necessary, any military successes
now might start a trend towards the ultimate pacification of the country. Fur-
thermore, the rigorous monsoon weather is likely to have taken a greater toll
of rebel weapons than those of the Government forces. If, by the end of
Septemb,.3r when the monsoons are over, the Government has adequately reor-
gani7eri its military forces, it may by able to seize the initiative from the
rebel=s. The Government, however, is threatened by serious economic diffi-
culties which may prove even more dangerous than the insurrection. while
loyal forces hold most tons, the rebels control largo areas of the hinter-
land and straddle the main lines of communications. The insurrection has
probably already reduced rice and teak production, and -.,in prevent the
export of other stocks on hand. :since these commodities, especially .rice,
are the mainstays of the Burmese economy, the ability of the Government
to prevent inflation, assume the burden of an expensive military campaign,
and import sufficient consumer goods for any length of time is highly ques-
tionable unless it secu-es substantial outside military and financial assis-
tance.
L x
Fr13isiona held Bces brs ~r~d miners. The Communist-led "B"
insurrection in 1.1alaya appeas now to be restricting the work of tappers
interfering with the vital replanting on rubber trer. s, and causing growing
apprehension among planters, miners and laborers. The planters and miners
are reported to have estimated that the services of four divisions will be
required to undertake both offensive and depensive operations ,7hich they
believe necessary if law and order Is to be restored.
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.1.gYA continued
Nn7 ZEAL~~N AUS7 xLIA
HIM Zeaa AW pound appr9 ixtion a ... ..#p,..he an nt, ~ i .ntionarv me s NO
It now appears that the primary objectives of the suprise New Zealand currency
appreciation program are: (1) to strengthen the internal stabilization program
which has been greatly weakened in the pest IS months, and (2) to preserve
the New Zealand sterling balance which is expected to fall later in the year.
A strong protest has been raised against the governments move by the opposition
Nationalist Party representing the Farmers Union and the Federation of Lnu-
factures. The Government proposes to placate the farmers with relatively
small increases in their guarranteed price. US Legation sources feel that
the New Zealand Government estimates of the reduced cost of living will tend
to be offset by an increase in import prices, and an accentuation of New
Zealand unfavorable trade balance. However, the Government appears to have
taken a bold step in its effort to create a more equitable distribution of
the national income without indulging in further inflationary practices in
the domestic economy.
AMetrali ens cr1 t 1 of the Noun Zee] an vo au 1ecia in. The sudden
decision by the New Zealand Government to raise the New Zealand pound to parity
with sterling is being sharply criticized in Australian business and financial
circles who, in spite of Prime Minister Chiefly's statement that his Government
has no such intention at this time., are predicting that their Government will
be compelled to follow the New Zealand move. Chiefly stated that in his opinion
the New Zealand action would not affect a recent trade agreement between the
two countries but it would increase the cost of New Zealand goods to the Aus-
tralian public. A national manufacturers organization in condemning the New
-Zealand action termed it a direct violation of the International Trade Agreement
which New Zealand ratified on June 29, 1948. The agreement provides that all
variations in exchange should be made in consultation with participating
countries.
Considerable pressure will undoubtedly be brought to bear on the Govern-
meht to place the official Australian exchange rate on a par with that of Bri-
tain, South Africa and New Zealand. However, Australia unlike New Zealsnd
is -a member of the International 1.1onetary Fund which must first concur in such
ST
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