INTELLIGENCE HIGHLIGHTS NO. 11 WEEK OF 20 JULY - 26 JULY 1948

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-01082A000100010010-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 13
• Document Creation Date: December 12, 2016
• Document Release Date: October 24, 2000
• Sequence Number: 10
• Publication Date: July 26, 1948
• Content Type: PERRPT

JJ G
1
CLASS. G: ls4,i\Gi_i) TO: T3 NEXT 6EVLWW GATE: ---_..--
AUTH: Hli 0?'
DATEIit REVIEWER: _371044
OFFICE OF REPORTS AND ESTIMATES, CIA
FAR EAST/PACIFIC BRANCH
INTELLIGENCE HIGHLIGHTS 10, 11
tiiEK OF. 20 .JULY - 26 JULY'. 1948
SECTION Io SMEARY OF FAR EAST TRENDS AND DEVELOPT1ENTS
The US proposal for increased Sino-Japanese trade with particular
to
reference to its relationship to the China Aid Program can be expected
elioit a vehement reaction in China (page 3).
Chinese Nationalist Government fear that all. Korea will fall into the
Soviet orbit and its consequent desire to keep the US in South Korea until
an adequate native security force is established has motivated recent Chinese
pressure on Kim Koo and Kim Kyu Sik to support the South Korean regime
(page 4) m
The Department of State holds that Siam.-.Japanese trade is not inimical
to `(7S-Siamese trade (page 4) a
The shipment of arms and ammunition to Malaya has become a major issue
in Australia and has resulted in unusually swift consideration by the Labor
Government of means to circumvent bans imposed by left-wing labor unions
(pace 5)
.
A recent Soviet broadcast beamed to Japan implies that only 200,000
more Japanese remain to be repatriated-as contrasted with US and Japanese
estimates of 600,000, thus leaving 400,000 uaocou ated'-for (page 6 ).
Although SCAP's suggestion that the Japanese adopt legislation for-
bidding strikes by government workers may avert an impending labor crisis
harmful to Japanese economic recovery, leaders of the affected unions are
bitter over the implications of the suggested restriction of presently
legal activities (page 6)Q
,tdl s 6ee3 y, the loi~iixg g
cac adiiiig seoti.o as._,of
notations are used:
(1) Double asterisk (**) .-placed at beginning and end of infor-
mation based solely on "S/S distribution" series.
(2) Single asterisk (=~) --to flag item containing "S/S distribution"
series.
(3) "B", or "C" -Importance, in BfFE'o opinion, of the item,
with "e representing the most important ones o
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SUV:4ARY (continued)
The' Chinese Natural Goverment remains in a precarious site tiou
(page 8). although during the past week there have been fao significant
new developments threatening its overthrow. The military outlook for
Nanking is very gloomy (page 8) ? Financially the Government is believed
to be hopelessly insolvent (page 8)a
Burmese Prime ref nistor, Thakin Nu, may risk an attempt to capitalize
on possible dissension vithin the Burmese Communist Party by offering to
include an anti-insurrection Communist in a reshuffled cabinet (page U) o
Continuing disturbances in Malaya may reduce rubber exports in the
near future (page 11).
The President of the French-sponsored central government in Indochina
admits weaknesses of his government (pageii).
The extensions by the Philippine Government of the deadline'fpr aims
surrender are raising doubts as to the sucaees of amnesty (pagell).
A :.Ascent Australian-dhinese agreement on Chinese businessman in
Australia 'may represent a modification of the "Z?ihite Australia" policy
(page)2)4
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SECTION II, DEVELOPMENTS IN SPECIFIED AREAS
Increase in Sino-Jaanese trade su steel b De2artmant of State "A"
The Department of State has advised US Embassy Nanking that arrange-
ments for increased Sino-Japanese trade would be desirable. It believes
that some of the requirements for reconstruction projects under the China
Aid Program to be paid for from ECA funds, e.g. railroad construction or
other machinery and spare parts, probably can be obtained at less cost and
greater speed in Japan than in the US or other available sources. In
addition, Increased trade on open account might take the form of China ex-
porting to Japan an increased volume of salt,, sugar, fruits, Tung oil, egg
products, minerals, and a portion of wheat bran from ECA wheat milled in
Chin; for its part, Japan could ship timber, rayon yarn, textile equipment
and miscellaneous goods.
The Department believes that the crux of Sino-Japanese trade is iron
ore and coking coal. Japan can compensate for Kailan (coking) coal by
supplying Shanghai with boiler coal and presumably mining timbers for
Kailan. In addition, redevelopment of iron ore resources in Hainan could
be explored. The Department recognizes the hostility of China to Japanese
economic development and states that it should be stressed to the Chinese
that iron ore and coking coal shipped to Japan would be a Chinese self-help
measure, in that these commodities are required for the manufacture of
specific steel products needed for approved reconstruction projects in China.
The expansion of Chinese exports of iron ore and coking coal to-Japan
would be of major aid to Japanese economic rehebilitatione Moreover,,
availability of coking coal and iron ore in China would lessen the Japanese
necessity to procure these commodities from USSR-controlled areas, e.g.
Sakhalin and would correspondinggly reduce the probability,, of the Japanese
economy becoming Soviet oriented., Nonetheless, the proposal for such
incrased trade, since it envisages expansion of Japanese heavy industry,
can be expected to elicit a vehement reaction in China which would undoubtedly
stir up further the already noticeable Chinese resentment against the China
Aid Program,
Generally, expansion of Sino-Japanese trade would stimulate economic
progress and stability in the Far East. Increase in economic stability
would mean concomitant improvement in US security interests. Japanese and
Chinese economic rehabilitation would decrease the possibility of economic
unrest being exploited by Communist interests, In addition to being a
stabilizing factor in the Par East economy.suoh trade would lessen the
drain on US aid funds.
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GEC (continued)
Chinese Nationalist Government fear that all Korea will fall into the Soviet "e
Chinese Nationalist Goverment fear that all Korea will fall into the
Soviet orbit and its co s-equant desire to keep the US in South Korea until
an adequate native security force Is established has motivated recent Chinese
pressure on Kim Koo and Kim Kyu S:ik to support the South Korean regime. This
pressure was undoubtedly a contributing factor in the recent statement by
the two politicians which denounced the establishment of a separate regime
in North Korea as a step toward civil near. The Chinese Consul General in
Seoul is reported to have delivered a message from Chiang Kai-shek to both
Kims, and to Rhee Syngman, which took the two Kim to task for attempting to
deal with the Communists controlling North Korea and threatened to disavow
all three leaders if they did not join forces in attempting to make the now
South Korean Government a success. Although Rhee claims that he is agreeable
to including the two Kime in his government, he has said that their recent
rather weak and piously-worded statement does not constitute a sufficient
disavowal of their previous North Korean venture. Despite China's generally
weak international position, it can continue to exert considerable influence
on South Korean politics due to Chiang's long standing association with
present-day Korean political leaders through the exiled Korean Provisional
Government in Chungking; and China's present strategic position on the UN
Temporary Commission on Koreas
S ansee trade hold not inimical to US-Siamese trade "A"
The Department of State, in reply to a warning by the US Ambassador to
Siam of possible conflicts Inherent in the proposed revival of Siam-Japanese
trade by SOAP, has stated that the development of Siam-Japanese trade is not
neoeasarily Inimical to US trade interests in Siam because: (1) to conserve
scarce dollars, Japan is being encouraged to increase purchases. from non-
dollar areas; (2) revival of Japan's international trade is imperative in
order to rehabilitate Japan's economy which is being maintained by the US at
a high annual cost; (3) it is not anticipated that the development of Sim.
Japanese trade will interfere with US strategic stook-piling of rubber and
tin; and (4) if Siam can secure goods more advantageously in Japan, the
resultant savings should enable Siam to purchase goods most economically
obtained in the US and other countries, thus stimulating a greater volume of
trade movement, -
The Department's position is represented as entirely in accord with the
US objective of fostering the general development of international trade on
a multilateral basis and permitting equal eececs by all counties to rkets
as well as in line with the US supported ITO Charter and the General Agree-
ment on Trade and Tariffs. -
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GENERAL (continued)
Shi n t of arms a n d a ,tion to Mils bsoomes ma or issue in Australia "B"
The shipment of arms and ammunition to Malaya has become a major issue
in Australia and has resulted in unusually swift consideration by the Labor
Government of means to circumvent bane imposed by leftwwing labor unions
Informal requests from Malaya apparently have. already been made in view of
the Government's announcement that it will use Air Force planes and naval
vessels to transport any amts it may decide to ship, thus oircumventing
union bans.
The 87DNEY MORNING HERALD. has reported its view that the present dis.a
orders were planned at a March 1948 meeting of the Indian Communist Party,
held in Calcutta and attended by Australian Communists, According to this
report, events in Burma and the outbreak of widespread stoppages in the
Australian coal fields were timed to coincide with the ialo.van uprising.
the Trade union
Adviser to the Federation of Malaya believes that the violence in Malaya is
being directed, through the maritime unions, mentioning the possibility that
Ernest Thornton, Communist Secretary of. the Australian Federated Iron Workers
and Eliot V. Elliott, Communist Secretary of the Australian Seamen's t)nion
are key figures in the chain of direction. The Seamen's union has already
proclaimed its intent to Impose a ban on shipments of arms to %laya, a
development which has been given prominence by the Moscow radio.
The present situation in Malaya, coupled with the hostility encountered
by MoMahon Ball's recent goodwill mission, could result in a reorientation
of Australia's attitude toward the nationalist movements in Southeast Asia,
Australia's instantaneous reaction of support for the UDC has already been
compared with her opposition to the Dutch in Indonesia, However, it should
be noted that in the case of Malaya Australian interests own about one
quarter of the. Malayan ta mines and that Singapore is still considered by
the Australis as vital to Australia's security,
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Industrial production i.n:lex continues u;-vrard curve. Prolixiniary fiCures
or Apr. shorv -_ui -e eaptanose in ustr_?a pro .ur?,tion index has
reached 4-Us 17.est pol.nt since t: e beoinn_n. of ;' e 0ccupoti on: 4:3.7 (the
base noriod 1930-34 = 100). This corr^)ar(,s vr'th an index of 49.3 in March
1948 and is a 23.6 percent iraprovenent over tt)e -;)ril 1947 index of 39.9.
US'Mas Japanese re xitriation #i:-ureso A 20 July Soviet broadcast to Japan
y
to eny ratan r: ports regardir Japanese P01'Fs in the
ME= groat 2aans
UiSR. The broadcast 'ncludod the stute.ent: "It is sufficient to point out
that the Soviet pooale have never even thought of using the 200,000 Japanese
to fulfill the post-war ," ive Year Plan." This statement cer ai n y inj :ios
that only 200,000 Japanese romatn to be repatriated Which is a vastly dif-
ferent .fit,ure from the a_~proximttely 000,000 which US and Japanese officials
claim are still in U OR-doriinated areas. The difference of 400,000 between
the figures is hard to reconcile. Should the Soviot broadcast have disre-
Carded Japanese still in Sakhalin and the Kuriles the di"feronco would still
be over 200,000. It is possible that the USSR may have been advisini Japan
as to the maxinuri number of nationals she may expect to have returned, The
"difference" may be accounted for by a combination of the following:.
(a) deaths in PUi camp.; (b) need for a l:Aborint; force; (o) hostages for
Ja,,;an? s future "good behavior", (d) denying Japan trained field and ventral
rank officers; (e) holdout troops in Manchuria who were never sent to
S?beriao
SCAT su sts lei al ban on stril.os by Japanese ~,ovornmont workers. General
ko Wt zur as sai` ;estc in a of Pr to realer AsM a that a,,~ ua s :Uational
Public Service Law be revised to pe:a~ali. ve ;overnrient c: _)loyees who resort
to strikes a d other dis ,uto tactics which tend to inpair the efficiency
of ;ovornnaent operations. The timi.n,; of this stop indicates an intention
to avert by early action the ro-occurrence of labor troubles between the
government un.1 the employees of state-run instrumentalities (railways,
corm nications, and certain co-L*:modity nlono_,lies) where throats of a con-
oral s tr1.l-:e have t-., Ace before necessitated IICP.P intervention.
In response, the Japanese Government has: (1), cancelled its aoaeptanee
o the mediation efforts of the Central Labor Relations Board and (2) bogun
drafting a revised law ,preparatory to call nt; a special session of the Diet
to consider its passaL;o.
Pressure to bring government empIoyeesv wa es more neu rl into line
with those of private industry has only recently made possible the consol-
idation of the goverm ont employees? struLCle with governrlento The disunity
evident at the time of the March communications workers crisis when the
government railway workers union (GR4'FU) under moderate leadership accepted
the Goverawunent 2920 yen wages standard, ended in June When leftists gained
control of the GIVU and swung it into line with the other government Workers$
demands for a 5200 yen wage based The government on July 16 accepted
mediation of those vrago demands but it insisted that the deT=nds are beyond
the ability of the government to meet within the recently passed budget
"B"
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i-APO (Contm)
wbioh had boon halancod at SC:LT''s insistence in terms of a 3701 yen rmCe
based Chiefs of the affected unions are bitter over the inirlleations of
SCAP4 s letter and aharCo that the Covernment, in revorsinn its acceptance
of mediation, is ignorinr, labor's present legal rights,
KORBA
Ro resentations ' 1.7ashi Mon to r:osoovr have failed to bring about a
_on. As anticipated*
Is Kroh . i n, -i.n. it reply to the note of una 2 , has roitorated its
position that all nationalized industries in North Korea, includi.nn eleo-
trio power stations, are under the direction of the Peoples Committee of
North Korea and that further negotiations concerninc electric tower should
therefore be conducted directly with that committee. This course of action
is politically impossible- for the IM since direct negotiations with the
Peoples Committee of North Korea would amount to de facto 'US roco-nition
of the Soviet puppet government in North Korea,
' 00000,
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C A
The -- -1 slop-itism 01 the remains "B"
unimproved. The low state of morale is attested by recurring rumors that
high Nationalist officials have engaged in peace discussions with the
Communists. There are increasing indications that the National Government,
no longer confident that it can improve the situation in Manchuria and North
China, is giving serious consideration to a removal to South China. However
such a withdrawal probably would precipitate military and political disinte-
gration throughout Nationalist China. I'or the moment none of the principal
Nationalist leaders appears ready to participate in a more to force Ohiang's
overthrow. This reluctance is partly based on the fact that Chiang'.
Goverment ip the recipient of US aid, in which they hope to benefit, and
partly on their fear of piecemeal destruction in the event that the National
Government breaks up. In addition, they realize that despite Chiang's
great lose of prestige he still holds in Chinese politics a unique position
of leadership which none of the> can match. Some of then remain hopeful
that he can be persuaded to delegate authority to competent and forceful
administrators who will give the Government new vigor.
Tba military outlook of the National Government remains Chin, Pessimism "A"
in high Rationalist circles compounded with the unrelieved low morale of both
the populace and the troops militates against effective employment of avail-
able resources. Current widespread Communist military activity throughout
North and Central China is seriously threatening the government at N:nking.
Despite the fact that the Communist forces in Manchuria, their best, have
been uncommitted for.over three months, the Nationalists have lost an esti-
mated eighteen divisions in the same period. In North China the Communists
will probably continue to harrass ft Tso-yi at widely separated points,
forcing his to shuttle his first-line troops from place to place thus vitiating
his strength, until additional, powerful Communist forces can be brought to
bear upon Pus area from the north and the south. Fu will then be forced to
retire once again into Suiyuen leaving Peiping and Tientsin to the Communists
or to attempt some sort of an accommodation with the Communist*. In Central
China, the long-term Communist move to isolate the large body of Nationalist
troops deployed along the xunghai railway by stopping all overland communi-
cations with base areas to the south is moving to fruition. The Communists
now threaten to isolate the large Nationalist military center at Hsuchon as
the Chinghsien-Kaifeng area and Sian have previously been isolated. If
successful (and indications are that they will be), the Communists should
then be in a position to carry the war southward into the Yangtze Valley in
force.
Ineolveno of the National G rnmtent. In an effort to arrive at a "A"
settlement of the substantial Chinese indebtedness to the import-Import Bank
the latter has requested the Central lank to furnish a complete and accurate
financial statement listing all the Government's foreign exchange assets.
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Such a statement is expected to reach Washington this week. It is believed
that the Chinese will not attempt to misrepresent their position by sub-
mitting padded figures as the US is in a position to verify various holding
accounts; also China looks to the US as the only country that might help meet
the crisis. This statement will undoubtedly reveal that the National Govern-
ment is hopelessly insolvent. Not only is their foreign exchange exhausted,
but there are literally stacks of unpaid foreign bills for which the Govern-
ment banks are responsible, and unable to meet.
As the revelation of the Government's financial weakness reaches the
Chinese public, as it surely will sooner or later, repercussions on foreign
exchange notes and domestic prices are likely to have most serious conse-
quences,
Sbaaghgj. ? s a r su r jnjions AP R? tars have been ordered "C"
stormed by the Shanghai Newspaper Guild as the result of a long smouldering
rate dispute. The US-owned "Evening Post" and the British-owned "North
.China Daily News" immediately published notices that they would defy the
Guild and pay the higher rates demanded by the news agencies. About a year
ago, the agencies converted their rates to Chinese currency at open market
rate and at the Guild's insistence adopted rates based on COL index. As a
result of the phenomenal decline in Chinese currency and the Index link the
agencies are now receiving a more US$10 monthly for large papers and as low
as $3 for small papers, instead of the original charge of $200 and from
$501100 respectively. Since the Guild controls newsprint allocations to
all papers Chinese publishers feel they are not in a position to defy it.
There is a possibility of the low rates being enforced by the Guild in an
effort to drive foreign agencies out of China.
eduction and rip of strategjc mater jala from China for 1J
stocknilina nurnoses should be a specific undertaking of the Chinese Govern-
ment under the China Aid Act, according to State Department instructions to
the Nanking Embassy. The Department had desired to incorporate such an
undertaking in an amendment to the Bilateral Agreement, but in view of strong
Chinese Foreign Office objections to this course, has now instructed the
Embassy to obtain it in the form of an exchange of notes, and if this is not
possible, the US interpretation of the agreement on this point should be
presented to the Chinese Government in the form of an aide-memoirs for pur-
poses of the record. This interpretation includes "the promotion of the
increased production of such materials ;within China, and the removal of any
hinderancee to the transfer of such materials to the USA."
A :Rreelude, , p xnse SnnressioA of anti-US criticism on Jam
22IL9 is indicated by a double attack from the KMT organ CHUNG YANG JIB
PAO on the TA KUNG PAO's editor who is accused of being a "fellow traveler,
communist mouthpiece, and anti-M." The TA KUNG PAO has been a leader in
anti-US building up Japan movement.
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in "C"
Nanking and Shanghai is seen in a reliable report of greatly increased buying
of clothes and other personal items by these persons.
T a Nat__ ions, , scat. Reports from Nanking announce that the Legislative "B"
Yuan has approved a ON $900 trillion budget for the last six months of 1948.
Although the budget for the first half of this year was sot at CN $96 trillion,
the Government spent CR $240 trillion. This deficit was met primarily by
printing press money. The new budget, which is based on June prices, will
also end up unbalanced unless the Government can curb the inflation and reduce
military costs which now amount to 80% of all expenditures. Although the
Government hopes to meet the new budget by. increasing taxes and customs
revenue and disposing of Government.-owned property, those measures are expected
to prove grossly insufficient as in previous efforts.
* Shgpghai Market
$ c s Bening Rate)
Wolesale Price of Rice
"C"
Official "Mao Slackmarket
ner 172 lb vicul
This week (23 Jul 48)
CN $480,000
CN $7,300,000
ON $ 35,500,000
Week ago .(16 Jul 48)
480.000
5,800,000
30,000,000
Month ago (23 Jun 48)
480,000
295501,000
14,5000000
Year ago (23 Jul 47)
12,000
41,000
350.000
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Government may offer cabinet post to anti-insurrection Communist. "B"
There are indications that Prime 'Minister Thak .n Nu' a Leftist Unity Plan
and offer of amnesty may have created some dissension 'within the ranks of
the insurrectionary Burma Communist Party (BC P) , Goshal, possibly see and
to Than Tun in the Burmese Communist hierarchy, is reported to be w111mng
to accept the Governments a offer, while Than Tura favors fighting to the
bitter end. Although the insurgents would be weakened by any defections
within the BCP, the insurrectionary-minded faction with the aid of dacoits
would still be capable of carrying on prolonged guerrilla warfare, and thus
continue to keep Burma in a state of turmoil. Nevertheless, it appears that
Thakin Nu, 'who has agreed to remain as Prime ?sinister at least until the
Parliament convenes an 15 August, may risk an attempt to capitalize on arr
dissension within the BCP by offering to include an anti-insurrection Corimunist
in a reshuffled cabinet.
t"ALAYA
Continuin disturbances reduce rubber Tg2orts. There may be a re- "B"
duction in ??.a yan rubber exports in the near future as a result of the con-
tinuing disturbances. Despite stringent precautionary measures British offi-
cials fear that the violence may soon spread to Singapore and further threaten
the Malayan eeonam7. The undiminished seriousness of the situation is indicated
by: (1) the transfer to ?`alaya of troops from Hong Kong and the UK; (2) the
outlawing of the ':".alayan C ommunist Party and several of its affiliated organi-
zations; (3) the registration of all Malayans; and (4) the promises of the
Labor Government to undertake all necessary measures to restore law and order,
FR? !'3CHT INDOCWtNA
General Xuan admits weaknesses in his g eminent, General Nguyen-van- "B"
Xuan president of the French sponsored provisional central government of
Vietnam., apparently is aware of distinct weaknesses in his regime. He is
reported to have stated, during a recent press conference, that his govern-
ment cannot function properly because: (1) the 5 June Franco-Vietnamese
Agreement has not yet been ratified by the French Government; (2) sufficient
funds to organize the necessary government services are lacking; and (3) the
resistance cannot be'crushed by military means, inasmuch as the friendship
of the Vietnamese would be lost even though the French might regain military
control, President Xuan argued, however, for continued confidence in both
former Annamite emperor Bao Dai and French High Commissioner Bollaert in their
efforts to satisfy Vietnamese aspirations and at the same time to maintain
French rights and interests in Indochina.
PHILIPPIAT',S
Extensions of deadline for arms surrender raise doubts as to success
of amnesst~t r, President Quir ors action extending to 31 July the period of
grace during which Hukbalahap and PK?T (National Peasantst Union) members may
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.42.
PHILTPPT!fS (continued)
present their arms raises serious doubts as to the ultimate success of
amnesty. '?uirino acted after the Huke failed to appear for scheduled mass
presentations of arms at scme 36 registration stations located throughout
central and southern Luzon.
Luis Taruc (Fiuk leader and Congressman from Pampanga Province), appears
optimistic concerning eventual. presentations of arms and attributes the current
delay to inadequate c ommunication, poor transportation due to the rainy season,
and too much emphasis on "surrender" of weapons. (The announced procedure
calls for legal licensing of firearms which have been registered .On the
other hand, Philippine law enforcement and intelligence agencies are much
less sanguine. These circles doubt the Huke' rood faith and believe that the
dissidents-hoping for assistance from the t' SE" during anticipated hostilities
with the'iTS--are tieing the period of grace to reorganize for further armed
violence.
There may be those among the Huk Communist leadership who will refuse to
accept arlr terms from the Government, however,, available evidence suggests
that the hesitancy of the rank-and-file Huk membership to present their arms
and accept amnesty is more likely duo to Government inaction on measures to
correct agrarian abuses and the Huke' fear of retaliation by private landowner
armies-known as "civilian guarder"-wand by the Constabulary. Unless sane
means is devised for overcoming this basic distrust, the Government will'be
forced to attend the period of grace beyond the present 31 July deadline,
AUSTRALIA
Australian-Chinese agreement ma re esent modification of "Ihite
Austra a" . A recent Aue n-C ese agreemen wh c appears
to be ae modification of the "':?Hite Australia" policy provides that Chinese
businessmen may remain in Australia for 7 years on condition that they
bring a starting capital of 500 pounds with them. If they wish to employ
a Chinese assistant required capital is 1000 to 2000 rounds. The assistant's
period of residence is limited to five years but the agreement provides that
this may be'extended for another five upon application to the Australian
authorities.
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