INTELLIGENCE HIGHLIGHTS NO. 21 WEEK OF 28 SEPTEMBER - 5 OCTOBER 1948

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-01082A000100020040-4
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 16
• Document Creation Date: December 12, 2016
• Document Release Date: May 23, 2001
• Sequence Number: 40
• Publication Date: October 5, 1948
• Content Type: PERRPT

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St -Bept. declassification & re ease instructions on file
OFFICE OP REPORTS ARID ESTIMATES, CIA
PAR EAST/PACIFIC MARCH
INTELLIGENCE IU GHLIGIITSB NO. 21
NEM of 28 8EPTEk BER - 5 OCTOBER 1948
SECTION Is 8U1 ARY OF 'PAR EAST 1REIWS AND DEVELOPMENTS
The Kremlin may be prepared to forestall UGA recognition of the South
Korean regime by proposing a "federation" of the two competing "National"
go v rzm ente (page 3) ? President Rhos . has underta c sn drastic counter-
measures against forces opposing his goverrwmtst. (page 6).
Serious Japanese trade difficulties are bung caused by 11S interest
(page 6) 9 A climax is approaching in Japanese legislative efforts to
delimit trade union rights in the civil servioe (SECTION III0 page 13).
In China the military situation of the National Government has become
exceedingly critical as the result of recent defeats (page 7). The
Chinese Canmmists are emphasizing urban administration as part of their
drive to take over large cities (page 7)a The long-standing deadlock in
Sinkiang bet n Chinese ottiolals and pro-Soviet dissidents may soon be
resolved through Sino-Soviet negotiations (page 7). .Lass of the Failan
coal mines to the Comssunists would sharply curtail Nation aliat China's
dwindling industrial capacity (page 8)0
Nu S laid Pareud er Phibul is demonstrating his ability to strengthen his
position (page 10)6
Isi Indochina the French appear to be preparing for another fall military
offspasi a (page 10). Ressaiwbiles in Paris Ambassador Caffery has reiterated
the US position regarding specific ECA aid tar' Indosohina (page 10)a
NO t In suoaeedii j sections o t s Weekly? Ica fo ng nargina
(1)
(2)
(3)
Double asteri6k (es) --placed at beginning and end of
Information based solely on "S/i distribution" caries.
Single asterisk (c) -to flag item containing "S f 5
distribution" series.
"A", "$", or "C" --importance, in BAS 0 s opinion, of the
item, with "A" representing the most important ones,
DOCUMENT NO.
MANGE IN CLASS. L7
DECLASSJFIED
SEC2LP 7Ca14Sv. CHANGED TO: TS S C
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s RY (eoniinasd)
So Ispublio of Ianonssia ars to have, been sueoesatul in Its
mi]itary drive assiiab C iot page U)o T ho aoaepianae of the 08
plan by both the Dutch and Indonedians paves the my for resumption of
0O0 negotiations.
to Burma tezision between Burman and 8arens is increasing (page n) v
An adverse renot3.on is expected in the Philippines to a US decielou
to disband the Philippine Scouts (page 12).
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SECTION IT,
N
WNWOMMO~
ni VEL P3IEH1S IN spsonrnD ARM
O
Kremlin mast_
'opass, .ocm rcm s.a on Karen at UN
"A"
The Soviet 1 delegation may make a conciliatory proposal then the
Korean problem is presented to the current WIGA session. It is considered
probable that the Kremlin is prepared toofbrestall UNGA recognition of the
South Korean re an ostensible concession in the form of a proposal for
the "federation of the two competing Korean "national" govermnento* The
Kremlin doubtless has had no illusions that its elaborate efforts to matcha,
step-by.step, the development of a new government in the south could
succeed in securing US recognition for its puppet regime in the north, It
is more likely that these Soviet moves were eo timed as to assure a good
bargaining position in the forthco UmA disouisions of the Korean problem.
A Soviet "federation" proposal would be diff'toult tto ignore and would appear
sufficiently conciliatory to incline many menber ntione toward delaying a
final UYVA decision on anpther delicate situation in which it cannot
effectively intmr' ene, Should th .s ' point of view prevail,, the Kremlin would
have succeeded ih forcing the UN to accord equal recognition to a govern-
ment created in defiance of.its resolutions and to one created under its
auspioee, This would have a severely damaging effect on the domestic
prestige of the infant "Republic of Korea" and would leave the Soviet
position mired since there would be almost limitless opportunit es for
Soviet obatruotdonist tactio in any, subsequent negotiations on the principles
and procedures of "federaticAo"
China's relations with other Far Bast countries
Greater Chinese interest in promoting cordial relations with Far
Eastern countries and in closer alignment with- the US vis-a-vis the USSR is
indicated In recent statements by, two National Government leaders, Foreign
Master W=g Shih-ohieh and former Premier Chhrik Chung. The Foxeigu
Minister at the VHGA in Paris steeled the importance to the Far Bast of a
free and united Korea, and praised the US and the Philippines for granting
do facto recognition to the southern Korean regime. He warned outside
opt r ees not to interfere with self-determination of the peoples of Asia,
at the same time pointing out Asia's under-ropteaentation in the Security
and Economic and Social Councils, Chang Chun, in a public statement on his
return from Japan, approved SCA?'a policy in Japan and assured the Chibose
that Japan was no longer a military or economic threat to China. He urged
the creation of an Asiatic economic bloc to include Japan and the early
convocation of the Japanese peace conference. Though speaking in no official
capacity, Chang has been considered as acting as Chiang Kai-shek's alter ego
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GEM AL (continued)
and his reoommendationo regarding Japatr represent a significant contrast
to the vehement anti-Japanese feeling so frequently manifest in Chin.
However, barring greatly increased mediate VS aid, continuing deteriora-
tion, in Nationalist China increases the vulaeability of the National
Goverment to Soviet overtures to iate the tlivil war and tends to
neutralise any positive and indepo ident efforts China may make in foreign
relations e
NeW Siamese
olicy vis-a-vis French Indochina i 21em rated
The recent visit of a 8iame q`e military and friendship mission to
Saigon has apparently resulted i~t s, pow Siamese policy of cooperation with
France vis-a-vis Indochina, Although support for Indochinese "free" move-
ments in Slam me withdrawn atte:; the assumption of power by the Phibul
regime,, little afte done to tahi11,it the activities of these refugee grpaps o
Since the return of the mi.showever, the Siamese police have been
ordered to deny the, right of xi--entry to Indochinese refdgees who leave
Siam and attempt to return. ':Moreover, the Indochinese refugees are chocked
at several different places fAfter orossiug into Siam and now are expressly
prohibited from holding demmstratidne ar possessing arias. Since determin-
ing who are now and return .d refugees is diffilelt, the Implementation of
these new orders may result in the oxelusion of all now ret geee from
Indochina, In a4dition, .Siamese ~olioe have been crossing into Lao terri-
tory, apparently with Fi-inch ooneent,, and are reported to have stopped
several food shipments to Laotian guerrillas across the northest bdrder.
The genesis for t'nis neat, S1ametre policy probably comae irbm Siames
premier, Marshal Phibiai, who is`reported to be expecting. France to return
part (Lanohang) of the areas retroodded to Indochina by Siam in 194d, In
May 1948, Premier', Pbb.ibul publicly announced that giam had dropped the
question of omeraeip of the four disputed provinces which Siam took by
military action ar'l Japanese assistance in 19411, This etateme tt was be.
lieved to have bec,o made in return for eArly French recofonitidn of Phibula a
ner govern ent. '! ovever, it would appear t gat Phibul has been able to
effect a now agre i mento
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m
,t ,pee& SCAP
has outs-in the ficulties engendered by US interests which have cur-
tailed export sales by Japan. These include such salient factors as: the
CCC cotton agreement shish prohibited sales of Japanese cotton textiles in
the US during a period most favorable for such sales and dollar aocruals
therefrom; opposition by US textile groups to sales of Japanese cotton
textiles to other areas capable of paying dollars; restrictions on areas
of procurement of raw cotton resulting In incurring dollar costs for
textiles most of which are marketed in sterling areas; efforts by US ship-
building interests to relate US and Japanese selling prices of different
quality of construction and materials; urgent requests by the US Maritime
C omission that US shipping be specified in commercial deals in spite of
SCAP policy to sell FOB Japan and buy CIF Japan; vigorous protests by US
textile machinery manufacturers against the pricing of textile machinery
sold to India on the basis of undercuLttng US price levels; and opposi-
tion to the importation of Japanese procesoed fish into the US, including
a formal resolution by a State legislature.
The difficulties as to procurement of cotton and sales of cotton
textiles outlined by SCAP are being overcome in large part by such actions
as US banking syndicate loans, the revolving fund set up by the US Congress,
the occupied Japan export-import revolving fund, and the recently concluded
sterling area agreements providing for sales for sterling. On the other
hand, the pressure of US private shipping and fish products interests,
enhanced by lingering wartime hostility will be major obstacles which can
be expected to continue for some time.
In addition, SOAP states that other influences preventing the full
utilization of Japanese resources for application to Japanese economic
recovery or for maximizing foreign exchange income are: the continuous
contributions to the Korean economy without raga ]rsement;! initial open
account sales to China of products badly needed in Japan for which there
is still outstanding an indebtedness of approximately *7,000,000; and
utilization of Japanese resources in implementation of the program of
reparations removals.
Efforts are being made currently to stimulate Chinese exports of Iron
ore and salt so as to cut down its trade deficit with Japan, The other
cost items are short-term which will be eliminated within the next couple
of years.
SERRET
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. It is probable that no real revolutionary
threat exists but that a is motivated by a desire to stifle growing
popular opposition. In any event, his actions wi l serve to make the
brewing political crisis more acute and ashy precipitate a showdown
between t opposing political forms before Korea's case is disposed
of by the Oll. Aheeos leinister of Hoare Affairs claims, by the arrest
of the reputed ringleaders in Seoul, to have frustrated an alleged
rightist plot to overthrow the government. Three leftist newspapers
have been closed, and tventy editors and newspaper staff members off`
various Seoul papers have been charged with fomenting revolution by
the publication of "misleading" news.
widespread opposition to Ahee's policies, evident both in the
National Assembly and in the Seoul press, has been spawned by his
unpopular stand in favor of an effective rice collection bill, his
controversial cabinet appointments, and general apprehension over his
broad constitutional powers.
Rhee'a rpolioj action against rightist and moderate political
opponents' suppression of the critical Seoul press, and veto of the
Assembly's rice collection bill will only serve to unite the opposition
groups in the Assembly who have been planning an anti-Rhee coalition to
effect constitutional changes reducing the President's power,
'SECRET
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CHINA
The National Governaent's.militar position is "exceedingly critical" nt-s
as a resu t of severe military reverses suffered during the past week. **
Successive Communist attacks cutting through the Chinhsien-Hulutao area
of the Johol-Liaoning, corridor against the troops of DU Tso-yi and 1'AN
Han-ohieh have isolated Nationalist units, thereby setting the stage
for their annihilation. Concurrently Communists are attacking the Kweisui-
Tatung, sector forcing F'U Tea-yi to move his troops west to pro-toot the
vital Peiping-Suiyuan Railroad thereby weakening the Peiping-Tientsin
sector, Following the fall of Teinan nine Red columns were released
for further operationao four of these oolumne are now reported moving
south, possibly toward tiaucbou. This force constitutes for the Communists
a large strategic reserve which the Government is totally lacking tn
any sector, In Manchuria the Generalissimo ordered the Nationalist
commander TjEI Li=huang to air-lift one army from bukden to Chinhsien
but the air-lift was not completed due to Communist capture of the air-
strip, WEI has also been ordered to move 15 of the remaining 20
divisions defending bukden southwest to assist FAN Ilan-chich in his
attempt to hold the corridors Nil Li-huang has so far failed to carry
out the Generalibeimo's orders. Throughout all operational areas the
Communists retain the initiative and capability of concentrating decisive
strength in any area without sacrificing any of their present positions,
Some US military observers believe cessation of large-scale Nationalist
military resistance may only be a "matter of times"
The Chinese Communists are now emphasizing urban administration as ttB"
part of their drive to capture and hold cities. They are intensifying
an effort which has been developing for several months and which contrasts
with their former program aimed at rural administrations In capturing
cities they hope to assume control of the Nationalist urban political
and economic machinery unimpaired by offering protection to
all elements of the populations including foreigners, providing they
cooperate with the o onquerorsn Their own political cadres are being
trained to go in with the army and keep the municipal organs operating
effectively. In connection with their policy toward cities the Communists
are.also stressing industrial development and are appealing to private
capital and skilled technicians whose tLasistance they undoubtedly need
Their emphasis on cities is an indication of the progress the Communists
are making in carrying out a coordinated military, economic and political
programo
A Sino-Soviet agreement concerning; 5inki an may be forthcoming. "A"
rherre are signs that the long-sta.ndini; deadlock between Chinese officials
and pro-Soviet Ili dissidents in Sinkiang may soon be resolved by an
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understanding between the USSR and representatives of (n. CHANG Cbih=
ohtimg, top Chinese official for Northwest China, The replacement of
Sinkiang Garrison Commander Gen. SUNG Hai-lien, strongly anti-Soviet
and an advocate of rule by force, by Gen. TAO Shih yueh, a conciliatory
"politician-general" like CiiAUG Chih?'chungi suggests that the latter
may be laying the groundwork for an agreement with the USSR. Recent
reports of a relaxation of the Soviet grip on the Ili area of Sinkiang
suggest that arrangements for Soviet mediation in Sinkiang maybe underway,
Renegotiation of the Sino.Soviet Aviation Agreement may wall be included
in such an.arrangement. LIU Tseayung, Foreign Office Commissioner for
Sinkiang who is said to be on excellent terms with the Russians, went
to Alma Ata five weeks ago with authority to negotiate a new airline **
agreement. He may also be discussing the overall Sinkiang problem with **
the USSR.
Although there is precedent for a purely local Sino-Soviet under-
standing in Sinkiang, it is possible that Soviet mediation there at
this time could: 1) broaden into discuaaions of all outstanding Sino-
Soviet issues, including the question of coalition with the Chinese
Communists, should the National Government accept a formal offer of
Soviet mediation; or could 2) be one of a series of local a greemerits,
should Nationalist China drift into regional warlordisme
Shanghai's coal supply has reached a dangerous low. No coal ship-
ments from the important Kailan mines have been made since 13 September
with the result that Shanghai's stockpile is already well below the
emergency level of 60,000 tons. Furthermore, no coal is expected to
be shipped from the Katilan mines for three or four more weeks as the
C-ists continue to blodk the railroad to the port of Chinhuangtaoo
The possibility of Commeunist capture of the mines is increased by the **
diversion elsewhere of Nationalist troops from eastern Hopei and, in any
case, the Nationalists are incapable of preventing Communist interruption
of' the railroad. Since Nationalist industries and power plants depend **
on >Sailan coal for 700 of their requirements, the loss of the mines
will sharply curtail Chines dwindling industrial capacity,
Shanghai economic control area ex ynded Gone CHHIANG Ching-kuo's -'C"
jurisdiction has been extended to cover the provinces of Chekiang,
Anhwei and Kiangsu (including Nanking), an area comprising, in terms of
the Chinese economy, the richest section of the country in agricultural
and industrial production. This extension would permit supervision of
the source of Shanghai's food and raw material supplies which recently
have failed to reach the city in sufficient volumes Also the flight of
local hoardings to surrounding areas will now come under ClilAUG' a purview,
In spite of this enlarged sphere, price stabilisation is expected to
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fail in view of the small segment of the total economy in which control
aeaeures are even remotely possible*
Curren Prioeso No significant economio,developnents attributable
to the fall o to the Cousminists have yet been observed, howevera
repercussions are expected when the lose of this stratebic city is fully
realisedo The Shanghai foreign exchange black market is shill confined
to undercover dealings; meanwhile, the future stability of the gold
yuan rests almost entirely on the Government's ability to hold the line
militarily, Shanghai prices changed little during the past week due
to police measures which have resulted in compressing an already tight
commodity mrket. The price freose has retarded the flow of consumer
goods and raw materials to the metropoaitan area while inflationary
idle funds are beginning to accumulates Parn.ors are generally unwilling
to sell their Goods at the low ceiling prices. However, prices in
uncontrolled cities continue to risen
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flow
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SIAM
ibul a oneoU tea osition. It is believed that Premier Phibul, by "B"
1mplama program oooperatlon with France, is erAeavoring to strength
?n his political position by appealing to Siamese Irredentism. (See General
i