OFFICE OF REPORTS AND ESTIMATES, CIA FAR EAST/PACIFIC BRANCH INTELLIGENCE HIGHLIGHTS NO. 62 3 AUGUST - 9 AUGUST 1949

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-01090A000500030018-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 11
• Document Creation Date: December 9, 2016
• Document Release Date: January 26, 1999
• Sequence Number: 18
• Content Type: PERRPT

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FAR EAST/?PACIF.F'IC BRANCH
OFFICE OF REPORTS AND ESTIMATES
CENTRAL INTELLIGENCE AGENCY
PrOTIaE a T -A& dooument is a working paper, not
an official. CIA issuance.,, it has been co orcdina-
ted within ORE, but not with the I,AC Agencies,
It represer .s current thinking by speolalists in
CIA, and i?, designed for use by others engaged.
in similar 3? overlapping, studies,, The opinions
exp+?essed h=arem may be revised before final and
official publication. It is intended solely for
the informa on of the addressee and not for fur-
ther dissemination.
Copy fort
Editor
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: 0A1
OFFICE OF REPORTS AND ESTIMATES, CIA
FAR EAST/PACIFIC BRANCH
INTELLIGENCE HICfiL,IG}I'IS NO. 62
3 AUGUST 9 AUGUST 1949
25X6A
The northern Korean attack in the Ongjin peninsula and the southern
Korean limited counteroffensive last week apoear' to have been only minor
readjustments of terrain holdings along the 38th Parallel (p. 3).
Defection of Nationalist forces in Hunan has facilitated the Chinese
Communists' progress through that province. In the Northwest, Communist
forces are continuing; their thrust into remote Kansu (p. 4). Meanwhile,
CCP rumors of the impending outbreak of US-USSR hostilities probably are
being circulated in order to consolidate the control of the Party's
leadership (p. 5).
A defeatist attitude among leading figures in Thailand has not been
lessened by the current US arms aid proposal, which is viewed as further
evidence of US 1ao:: of concern over the fate of Southeast Asia (p. 6).
Preliminary agreements between Republicans and Federalists on many
of the points to be raised at the roundtable conference at The Hague, as
well as a more conciliatory Latch attitude, indicate the possibility of a
final settlement of the Indonesian problem (p. 7).
The financial picture in the Republic of the Philippines is darker
than any time since 1946, due to a sharp fell in governrient revenues (p. 8).
The marginal notations used in succeeding sections of this Weekly
("A", "Sa, or "Ce) indicate the importance of the items in BA opinion
with "A" representing the most important.
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 25X6A
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25X6A '?3-
KOREA
On n incident ass 3- -1?: o ale fighting a boars c again developed on ?f3-,I
the Onp in peninsula la it i:r .ls (see Intelligence Hiifhlighte J 55)a The
brief battle developed when two battalions of the northern: Border Con-
stabulary attacked vitae Republic of Korea's hill positions along the 38th
Parallel,: awo ROK Army conpard.o were overrun in the initial aciva.r e
front the north but other elements of the regiment defendinr, Oirpiin re-
rained a portion of the lost ground. Plans for further southern n.ounter-
attacks? fo:lowin7* the arrival of -+ ter-borne reinforcements from Inchon,
were not carried out and the incident appears to be closed for the :rresent.
Although there have been reports that northerri. Korean+. plans Call or
the con plcte occur ation of the isolated (:)ngjin poninaula by 10 AufrustY, the
recent attack! did not cope it desi.rned to aocomplisha more than `sae limited
objective of elininatir?fi southern Xoreari positions on hills :lipl.,tly north
of the 38th Parallel,. Althcmrh military preparations are 'heir(, rus .ed in
both north rn and southern Y-ore an, it is extreereely ciciizliti'ua1 that the .reoent
Ongjirr fir,htircc" ie an innxedi.ate prF.11ude to the I.on-thretate.ned civ13. war.
?'r Korean, mines seek private aid---A su pestion of possible ecrrmrnic troubles
ese3tt?.r!' the northern Korean 3}erir)aastlc Peoples' Rloniiblio is contained in
the ar;rY~~>;.ace tent of a recent cablr,.et rieoisian to establishh a system, of
"trust j i.narerien u" for mine cl.eve1o r-..e.nt: and mineral exploration, -,Iesimed
to enco:irare private ieris 5 and nr retiot of nationalized. nirios.
In view of the Communist ornitr-A of .northern rnrea's econor*?y? this
decision to seek 'private irdiistrialists and private capital" in the field
of mineral exploitation is of nnrticular s1g if icarire. f ffia,lent utiliza-
tion of northern Korea's well-developed industrial plant regiiirea a steady
ay
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flow from the area's abundant mineral capacity, almost exclusively under
State control, This departure from the State-control pattern would seem
to indicate a severe State shortcoming in fulfillment of mine production
requirements under the "'Two Year Economic Programs"
CHI NA
Nationalist defections ease Communists' drive South--'o'ne defection of two
successive Hunan governors, together with the troops under their con. mand,
to the Cosmun'.sts during the past .reek. has given the Communists tuiopposed
entry into Changsha and lisiangtan, as well as an easy advance to Shaoyangr,
all important points north and west of Hengyang, the only large defense
ease remaining to the Nationalists in Hunan. The National Governrrgn't had
removed C;'';(; Chien, one of the vice-presidential candidates in the Nation-
alist elections of April, 1948, from his office as provincial governor and
ordered his arrest before his defection. His successor, CHEN 1`dng-jen,
reputedly a strong CIIAI:G ran, shortly followed CIENG into the C3rmuniaat
caxr,p,
The forces which defected with these leaders were, for the most part,
either local garrisons or troops still in training and their loss will not
crater;all?r affect PAI Clung;-hei' defensive position in the area. By mid-
July; PAZ had already withdrawn his best F.wangsi units into their home nro-
vince and Ilengya.ng probably will not be seriously contested.
Tn Support of this views Ccm nuni.st troops, which would have been used
in any large-scale assault on Hengyang, reportedly are rzovingr southeast to
join attacks in the icanhsien area near the Ywaxigrtangr border. Communist
success there should open the way for an early advance into Kwantungg.
Canton, the ultAmate Communist objective in the southern drive, is the
scene of "feverish" defense preparations, but the Nationalists lack both
the means and the will to defend the re'u?ee canital.
In the Northwest, no opposition has impeded the Communist advance
into eastern Kansu. Pingliang and ?`ienshu1, two anchor points of A Pug-
fang's reported defense line, were occupied and the Communists continue
to move westward toward Lanohow, capital of Kansu and -gateway to Sinkiang.
Peiping radio has relayed an order to Comnunist soldiers in the Northwest,
outlining; proper f orras of behavior, in order to avoid offending Moslem
sensibilities. Stiffening f?esistance by the I.TAs, however, is expected to
halt the present Communist advance before Lanahow is reached.
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Cot runists bruit threat of US-USSR war-- on--0om nist sources in Com--
i:iaarai s Ciri rig recently have a .lceecr'that C{P leaders anticipate the
outbreak of a US-USSR war before the end of 1949. One source asserts
that General CHOU En-la i. -rho has been rega.r ded as friendly to the West
as well as to the USSR,, has now been pera,aadsd of the i.rrsarai.nence of such
a war and of the Soviet ability to win it, and has therefore been wholly
won over to the USSR.
There is no available evidenoe of a Soviet intention to launch ft
war in t ;o near future. Moreover,, if such an intention exis ?,:d, it is
doubtful, firsts whether t'V,e USSR would infom, 'the CCP of its war plaraa
ands second, whether the CCP would informi the notoriously loose-mouthed
splinter-party leaden who are the sources of these a1ie rations. While
the CC? has stated frankly that it will ally itself with tho USSR in the
event of an East 01est m r, there is little in the CCPte current ac-rions
(as distinct from pre;pag nca) to indicate a genuine belief in imminent
war.
It is more likely, thaarefore,, that the CCP is spreading: the r"iar or
of a war threat without believing in it. Such a threat would be helpful
to the Part, leadership in explaining to the rank-and-file the special
position held by the USSR in the border a?eas, in consolidating control
of the CCP's Stalinist leadership, in justifying the severely repressive
espects of CCP policy, and in enlisting the cooperation of hitherto
hostile elements of Chinese society.
+ths escape endangers British in Chin. s--'die British sloop Amethyst's
escape from the Yanotte has aroused strong Chinese Communist resentment
and probably will lead to retaliatory actions against the British in Hong
Kong and in China proper. In belated but virulent reaction to the affair,
the Communist press has charged the Britieah authorities with "bad .faithfe
and has asserted that British `~ia~per gal ist n will be eating "evil fruits"
wuch as the Americans already have digested.
Ce-_n.fronted by the loss of presttige associated with the Amethyst
esc ape, w wile facing increased economic difficulties in the lower Yangtze
area, the Chinese Cor?unists probably will create serious trouble for
the British. Recent reports from Shanghai Indicate a Communist belief
that the affair has jeopardized the hitherto relatively comfortable
British position in Communist China,and a Corr unist intention to take
action on the Hong Kong question as soon their forces reach the Kow-
loon frontier. Guerrilla activities, frontier incidents, and other
pressures probably vxi11 be employed,. and overt military action is a
dictinot T osaibility. P`eanxhile, propaganda campaigns and the now
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familiar pattern of coercive tactics against foreigners probably will
be in evidence against the British in Shanghai and perhaps Nanking in
the near future.
Nationalists protest USSR-Manchurian trade agreement--The National
overnment~ s vigorous protest to he USSR against the recent Soviet
Manchurian trade agreement evidences a Nationalist intention to capi-
talize on Chinese Communist subservience to Soviet Interests. In its
formal note to the Soviet Charge in Canton, the Nationalist Foreign
Office pointed out that the agreement, concluded with "rebel groups"
in Manchuria, violated China's sovereignty and marked a further failure
of the USSR to comply with the Sino-Soviet treaty of 1945.
In upholding the principles of China's sovereignty and independence
on the diplomatic front, the Nationalists make a strong appeal to Chinese
and foreign opinion and further substantiate their propaganda claim that
China's existence is menaced by world Communism. Meanwhile, the Chinese
Communists are left with the task of defending a potentially disadvanta-
geous trade arrangement. In addition, they are confronted with the impli-
cations of a developing political schism between Manchuria and the rest
of China implicit in the delegation of local Manchurian authorities to
conclude an international agreement in Moscow.
Government ulna y over MAP--The current MAP proposal, which would rake "A"
pp -
US arms and equzipment ----available to Thailand on a reimbursable basis, has
been received with little enthusiasm in Thailand. Because it would make
US military support available only on the same basis that it is now
available from the UK, Sweden and numerous private arms dealers, the pro-
posal is being interpreted in Thailand as further evidence that the US
is not greatly concerned about the fate of Thailand or of Southeast Asia
as a whole. Development of an attitude of futility and fatalism among;
important political and military figures in Thailand continues to be
accelerated bys (1) the rapid changes in China and the loss of US in-
fluence there, (2) the presence within Thailand of a large and economic-
ally powerful Chinese minority which is being subverted by a well-organized
Chinese Communist group, (3) the presence of scattered bands of Chinese
Communists and mercenaries along Thailand's northern and southern borders,
and (4) unrest in neighboring countries.
Although the Thai Government has taken an anti-Communist stand and
although Thailand's political and economic structure contains relatively
few elements conducive to the acceptance of Communism, it is hardly to
'IN
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be expected t1 at Thailand will oe able or willing to resist an acoom-
rn? Aa+-3 ^" 1,, 4-r~, nx_.. -- - 1 ----- -
! ,aec netat on aesn ma ox? Issues robabl.o at The -The korthcorti ig "3f
roundtable conference , w ich is + xpe a .~ d ~t .burin about 25 august at
The Hague represents a real milestone towards the possible settlement
of the Indonesian problem. While Federalists as well as Republicans
will be represented at the conference, any settlement will depend upon.
solution of the basic differences which have existed be een the Republi o
of Indonesia and the Netherlands since 17 August 1945, the date i?J laai the
Republic declared itself independent,
Foremost among these differencef is the question of sovereignty,:
The fenubuieans take the stand that they have already acquired all the
attributes of sovereignty. `he possibility of a settlement of this point
has been improved slightly by the Dutch indication of a wi:ilinguess to
shorten the interim period, to transfer sovereignty to a united Indonesia
early in 1950 said to set the exact dt.ttfe for the transfer at the conference.
The fact that details of the proposed Indonesian federation's structure were
agreed upon by both RRepublioans and Federalists at an All-Indonesian oon
ference prior to the departure of the Indoresian delegates also should make
a settlement of the sovereignty issue somevrsiat easier.
In the field. of forei relations, agreEment has been complicated by
the inderondenco of action exercised by the Republica particularly the
appoin-tent of a Republican Consular official at P.Seanila in Tax: y? Another
crucial point., in oontrast? the problem of maintaining the identity of the
Republican Ax sy,, may have been simplified by the agreement already reached
between the Federalists and the Republicans on the composition of a federal
army, as well as by the Dutch announcement that there will be, a withdrawal
of Netherlands troops from Indonesia.
Delineation of the Republican 'territory within a federated Indonesia
certainly will be a major problem,, Many Republicans feel that their areas
nave been unduly compressed in the last two years, and they may resent
transfer of authority over sizeable Repuihli.=.an regions in Sumatra to Dutch-
sponsored states there. The extent to which Republican forces comply ith
last weekbs cease-fire order, particularly in Sumatra, which will serve to
illustrate Rerubl .car ability to control t e populace in disputed areas,,
may well serve as a basis for their claims to territory,
The most complex problems to be considered will he those of an economic
and financial nature,, Aside from divergent viewpoints in re and to economic
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L
pllicyg, the question of financing an independent Indonesia will be
of primary importance. Dutch finrn,cia1 experts have declared that
unless sufficient credit for adequate supplies of goods is obtained.
it will be inposszble to mai tai :lormai eoanoniia conditions in Indo-
nesia. Foreign debts of the Dutck,:-controlled Indonesian Government,
from the time of the Japanese surrr-=.ider to the end of 1949, rnoreover0
will aniow t to $1 billion? which ra'.ses the irimediate question of the
extent to which the new In oriesian f,:ideral overnment will assume this
debt as well as the extent to s hich provisions v+i ll be mete for settlemont
of the rights of forei i investors in Indoneesia.
Once all these problem relating o sovereigrxty have been solved,
the fornaation of a Ilether1ands-Indofesa;am Union will be dircuased ar d*
if obstacles to its formation are overt:. e, consideration will be giren
to the granting; of military `'asea to thc' Nother lands,
Although the basic i.s suos of the Inianesian conflict have rem a.tr e
essentially the ywne since the formation -of the Republic, the current
negotiet .ons at he Hague vvi_ll be taking 1.inoe In a more congenial atmos-
phere than has prevailed at caarlior formal discussions, Dutch leaders
have adopted a more conciliatory attitude ~. ward Indonesia Within recent
mont1is, many impediments pre>3ent in previout? negotiations 1-a7e been re-
moved. and preliminary agreements, already ached between the Rcpubiictrns,
the Dutch and the .Federalists, should facilitate the pork of the conference.
Barring; serious incidents in Indonesia,, an a ;reement settling many of the
major isnues seems probable,
P1irL,IPPI3; S
Philip ir;o finane is.l icture darkens-The 'hi.'_ippine fi,arcirx , situation 'C"
apparently has become more cx?iti.ea1 than a-+, al y time aince the sun r? of
1946, when the U: frays obliged to authorize a. 675 million loan for Philip-
pine budgetary purposes. According to press re aorta, the current deficit
in the Gov, rnmenti s General Fund amotunt8 to $26 pillions apcproxinately
one-fifth of the national budget? It apper,, s th, t Govf!rnment operations
are being financed by, draw1.ng; on certain Gov-ernme t trust funds and by
horrowin ; from the Central &tnk
Falling revenues largely account for the defioit, although it is in
part the r^ea ult of increased expevndi t urea for e duos ti onal i ao't.1ities
authorized by Congress in 1948 but not included in the budget. The govern--
mentgs financial troubles else refl'eot the continue.. serious .mbalance3 in
Philippine foreign trade Tintativ figure=; for the. first half of 1949
indicate a visible trade deficit of at leas:, 144;,8 .n.illion, only partly
offset by US Government expenditures on rehabili.taVon. During this, same
} 1 1
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ragaglIAC,
half-year, ntatior a.:i. rovefa ,, declined by nearly one fifth.
Although import controls s ;re instituted in Januarys, 194u, they
have had little effec- in bringing about a trade balances par?tioularl;
n vie of a 45/% drop in the price of copra, the Philippines' member-,
one pos 'mr export, The Secretary of Finance and the Govee nor of the
Central Bank are pressing for wider application of import controls, and
the latter has sugr est:ed the possible need of applying exohanggc controls
to Prot of the dollar baIP-nce:a;, According to the 1I-Philippine Trade
Agreement, however, the free convertibility of pesos to dollars, may not
be suspended except by agree gent with the President of the Mr
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