CENTRAL INTELLIGENCE AGENCY LIMITATIONS OF SOUTH CHINA AS AN ANTI-COMMUNIST BASE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP78-01617A003200070008-1
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 13
• Document Creation Date: December 27, 2016
• Document Release Date: May 20, 2013
• Sequence Number: 8
• Publication Date: June 4, 1948
• Content Type: REPORT

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CENTRAL INTELLIGENCE AGENCY
LIMITATIONS OF SOUTH CHINA
AS AN ANTI-COMMUNIST BASE
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ORE 30-48
LIMITATIONS OF SOUTH CHINA AS AN ANTI-COMMUNIST BASE
SUMMARY
The deteriorating military situation of the Nationalist Armies in North China and
Manchuria has faced the Chinese Government with the necessity of making plans for a
future base of operations. Aside from the remote districts of the far west which are
unsuitable for the purpose, the only area with relative stability to which the Nationalists
could withdraw would be South China, including Taiwan. It is inevitable, therefore,
that a further worsening of the military situation would force the Government to make
such a withdrawal in order to survive in its present form. That Chiang Kai-shek
attaches great importance to -this area is evidenced in the assignment of ex-Premier
T. V. Soong to the post of Governor of Kwangtung. Soong's principal mission in
this office is to convert agricultural South China into a region which will be relatively
self-sufficient and defensible from Communist attacks.
Although the South China region includes one of China's principal "rice bowls"
and has many important natural resources such as coal, iron, and other strategic
metals, which could make the present goal theoretically attainable, seemingly insu-
perable obstacles stand in the way of its attainment for current Nationalist purposes.
Chief among them are:
1. Time. Even with ideal conditions, it would take at least several years to build
all the necessary installations and to create an industrial organization which could
efficiently make use of them. It is doubtful, as matters stand, that more than one year
would remain of uninterrupted Nationalist activity after withdrawal from the North.
2. Food. South China, where the most intensive agriculture has been practiced
for generations, is still a marginal area in food production. With the necessity of
relying on the food resources of this region for the maintenance of a large army plus
the enormous influx of refugees which would follow the Nationalist withdrawal from
North China, famine would be a chronic threat. The food problem in South China
may be mitigated, however, by rice imports from Southeast Asia.
3. Overly Ambitious Planning. Rather than concentrate on a limited program
which would deal with such basic elements as transportation, exploitation of valuable
mineral deposits, and the full utilization of plants already built by the Japanese on
Taiwan, the Government has seen fit to embark on overly ambitious programs and
projects such as the "Five-Year Reconstruction Plan of Kwangtung Province" which
have little possibility of success even though peace and prosperity attend the effort.
4. Disunity. The internal security of South China is threatened both by dissension
within the Kuomintang and by the hostility of anti-Kuomintang elements.
Note: The information in this report is as of 11 May 1948.
The intelligence organizations of the Departments of State, Army, and the Navy have con-
curred in this report; the Air Intelligence Division, Air Intelligence Directorate, Department
of the Air Force, had no comment.
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SEC
5. Civil Conflict. Cessation of hostilities in the North would only move the prin-
cipal battlefield to Central China whence, despite distance and poor communications,
it would eventually move to the South.
6. Capital. In the long run, the economic development of South China will re-
quire a substantial volume of capital. South China does not have nor could it create
the savings from which capital needed for development would have to be drawn.
Foreign investments certainly could not be expected in sufficient amounts for the
purpose, nor is contemplated US aid (much of which the National Government intends
to divert for the purpose) adequate under the present circumstances. Although there
is a pdssibility that some investment capital from North China may be made avail-
able to South China, there is as yet no evidence that this has taken place.
In short, assuming maximum Communist capabilities, any contemplated retreat
of Nationalist China into the southern area would be a measure of desperation which,
under present circumstances, would offer little future safeguard from eventual defeat
and collapse. Aid in the form of capital, food, equipment, and intelligent direction
could probably give the National Government reasonable chance of carrying on effec-
tive anti-Communist resistance from South China.
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LIMITATIONS OF SOUTH CHINA AS AN ANTI-COMMUNIST BASE
1. SOUTH CHINA AS A NATIONAL GOVERNMENT REFUGE.
Since early 1947 the economic and political stabilization of China south of the
Yangtze has ranked high among the National Government's non-military objectives.
Aside from the general advantages that Nationalist China would ordinarily derive from
the stabilization of South China, this area assumes special significance as a base for
continued operations of the National Government and from which Nationalist Armies
can be supported in the event that North China should be lost to the Communists and
Central China become an active military theater. The possibility that the Govern-
ment's foothold in Manchuria and North China would be lost has, during the early
months of 1948, added impetus and a sense of urgency to the Government's plans
for this region, which includes the provinces of Yunnan, Kweichow, Kwangsi, Kwang-
tung, Kiangsi, Hunan, and Fukien. Taiwan, although not on the mainland, plays an
important and strategic role in the planning for this region.
Control over the development of the most important area of South China has been
placed largely in the hands of T. V. Soong. He is not only governor of Kwangtung
Province but, concurrently, is head of the military, forces of South China, thus having
authority which extends beyond the boundaries of the province.
The present discussion of South China as a refuge for the National Government
is based on the assumption that North China and Manchuria will be lost to the Com-
munists. Certain concomitants of such an assumption will have an important in-
fluence on the potentialities of economic development, political stability, and military
security:
a. If the Communists take over North China, there is reason to believe that military
pressure will continue with increasing intensity against the National Government in
areas farther south. This would mean that Central China would become the focal
point of the civil conflict, that South China ? heretofore operating pretty much on a
business-as-usual basis ? would have to be developed according to the needs of a war
economy, and that the Government would have to continue its policy of deficit financing
with all the inflationary results that such a policy implies. If the area were to be
defended at all, the Government would have to salvage a large share of the combat troops
it now has north of the Yangtze. Although the present resources of the South China
region are probably insufficient to supply an army of adequate size to protect that region,
vital imports could be financed through the export of minerals and tung oil as well
as through the use of overseas remittances.
b. The Government would be faced with the serious problem of caring for the
substantial number of refugees who would inevitably find their way into Nationalist
territory. This influx of a large group of unemployed, poverty-stricken, restless "aliens"
would strain the existing delicate balance between food supply and population that
now characterizes South China and would intensify the problem of maintaining po-
litical stability and internal security.
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c. The effort would require time, much of which has already been wasted. The
National Government's efforts of almost a year have produced little more than schemes
on paper. Even with continued military deterioration and the prospect that by the end
of 1948 the National capital may well have to be moved into South China, no signifi-
cant part of the conversion plan has yet been carried out.
2. ECONOMIC POTENTIAL.
a. The Present Condition of South China's Economy.
(1) Mineral Resources.
South China has ample deposits of many important minerals. Its great-
est deficiency is in coal, the region having but 3% of China's total. However, approxi-
mately 20% of the country's iron deposits are located in the area. Hainan Island's
substantial deposits of high-grade iron ore as well as small deposits of iron and sub-
stantial reserves of coking coal close to the rich antimony, tungsten, and manganese
deposits of Hunan and Kiangsi Provinces provide basic conditions for the development
of a steel industry. In addition to the above, South China has plentiful tin and a
newly discovered small supply of bauxite accessible to the aluminum production plants
on Taiwan. There have been unsubstantiated reports of uranium deposits in Kwangsi.
In contrast, however, to this favorable mineral position is the production
record for 1947: only 4,000 metric tons of tin; 6,400 metric tons of tungsten; 6,000 metric
tons of antimony; negligible output of manganese; 250,000 tons of coal, all from the
Hunan mines; and insufficient iron to support even minor industrial activity.
(2) Agriculture.
Although Hunan Province is one of the great "rice bowls" of China, its
surplus barely makes up for the food deficit of Kwangtung Province. Even in times
of peace and relative plenty, the food output in the other provinces of the region is
barely sufficient to maintain the population at a subsistence level.
Should the Nationalists retreat from the North, however, the rich agricul-
tural land of northern Hunan, Kiangsi, and Chekiang, although south of the Yangtze,
would be exposed to the Central China battle zone and would thus be beyond the bound-
aries of peaceful territory under Nationalist control. The pressure of population against
the food supply would also be aggravated by an influx of refugees. The region's food re-
sources would furthermore have to supply the Nationalist military forces that hereto-
fore have been primarily maintained by the output from Central China. The resultant
food deficit would be catastrophic, unless large-scale food imports from Southeast
Asia could be obtained.
To mitigate this prospective disaster the National Government would have
to make at least a start on the institution of land reforms, the construction of large-
scale flood control and irrigation projects, the increase in the production of chemical
fertilizer, and the utilization of hitherto neglected but arable land in the western part
of the region. It is very improbable that such reforms could be achieved during the
period of present concern.
4 S. ET
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(3) Transportation.
(a) Waterways.
Although waterborne traffic is often interrupted by bandit operations,
the rivers and canals present the greatest immediate possibility for the large-scale
movement of persons and food.
(b) Railroads.
There are approximately 2,000 miles of rail lines in operation on the
mainland of South China. The Canton-Hankow Railway is in very poor condition,
but is in limited service throughout its length; the Chekiang-Kiangsi line is operating
through most of its length; the Hunan-Kwangsi-Kweichow line is in a state of dis-
repair and is operating over approximately three-fourths its length. Taiwan has al-
most 2,400 miles of operating railroads. The shortage of fuel, the deteriorated rolling
stock, and the continuing bandit activity, however, present a constant threat to the
operation of all lines.
(c) Highways.
Most of the roads in South China are primitive and still bear the scars
of the extensive damage suffered during the war. The high cost of highway trans-
portation and the lack of motor vehicles characteristic of the whole region, limit the
usefulness of whatever highways exist.
(4) Manufacturing.
Although there is a wide variety of manufacturing activity in South China,
most industrial operations are on a small scale and utilize little or no power-driven
machinery. Electric power output is barely adequate to supply the needs of existing
industry. Throughout the region there are few plants now in operation that are
large by Western standards. By far the greatest proportion of manufacturing plants
in the region produce consumers' goods.
Hunan, Kwangsi, Kweichow, and Yunnan Provinces became centers of
wartime industrial operations as the Japanese penetrated deeper into China's interior.
Many of the factories established in South China were moved from the east coast;
many others were constructed in a makeshift fashion from salvaged machinery and
equipment. These plants are high-cost, inefficient producers which probably cannot
operate without continued government subsidies.
There has been little actual improvement, if any, in the general industrial
situation since VJ-Day. Many of the factories in this region have had increasing
difficulties in obtaining raw materials and power. Funds that may otherwise have
been invested in industrial expansion have been attracted into the profitable black-
markets for US Dollars and gold.
One step toward increasing the output of important manufactured goods
in South China is the recent agreement between the Reynolds Metals Company and
the National Government as a result of which the contracting parties will jointly
operate the aluminum plants of Taiwan. The efficient operation and expansion of
these plants in conjunction with the exploitation of the readily accessible Fukien
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bauxite reserve should permit the operation of a profitable aluminum processing in-
dustry in South China. The lack of fabricating capacity in this region, however, is
a serious handicap in the development of an integrated aluminum industry.
(5) Foreign Trade.
Current exports from South China are considerably below the prewar level,
although tung oil and strategic minerals, such as tin, antimony, and tungsten are
in world-wide demand. Clearly, any program of economic development should in-
clude the reconstruction of those industries which could be important suppliers of
foreign exchange.
Overseas remittances were the key factor in compensating for China's
chronically adverse balance of trade before the war. In some prewar years total re-
mittances reached an equivalent of US $100 million per year. Since most overseas
Chinese emigrated from South China, the largest share of the funds flowed into this
region and represented an important factor in South China's economy. After the out-
break of war the value of remittances declined. All in all, however, South China's
situation with respect to international trade is probably better than that of China
as a whole.
b. The Future Possibilities of South China's Economy.
In addition to the improbability of increasing food output to an adequate level
and the bankrupt position of the National Government, South China suffers from a
serious lack of investment funds. Private Chinese savings cannot furnish such funds;
foreign investment in such a precarious project is unlikely (recent investment
by the Reynolds Metals Company and the Westinghouse loan for the production of
aluminum in Taiwan are exceptions) ; remittances from overseas Chinese have fallen
off from the prewar level. The only substantial amounts of capital which the Govern-
ment can now count on for the development of South China are reconstruction funds
earmarked from the US Aid Program. Movement of many industrial plants from
Shanghai to Hong Kong rather than to South China is symptomatic of the general
lack of confidence in the future of the Chinese National Government. In short, future
possibilities of South China's economy are dubious.
3. PROSPECTS FOR POLITICAL STABILITY.
T. V. Soong was appointed Governor of Kwangtung Province and Director of the
President's Canton Headquarters in September 1947. Presumably, his objective is to
create a model administration which will not only serve the National Government in its
military activities against the Communists, but will also counteract the Communist
program's appeal to the underprivileged and impoverished masses of the region.
Although Soong has been granted extensive military as well as civil authority,
there is some doubt as to his actual power. Aside from the presence of armed bandits
and Communist guerrillas in South China,* Soong's authority is threatened by repre-
sentatives of the Provincial administration which he superseded, by dissident Na-
* See Section 4, PROSPECTS FOR MILITARY SECURITY, for discussion of bandit and Communist
elements.
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tionalist elements who have refuge in Hong Kong, and by the machinations of anti-
Soong cliques within the Kuomintang itself. Tendencies toward separatism are deeply
rooted in South China, especially in Kwangtung and Kwangsi.
Soong has experienced some difficulty with old officials, who have continued to
occupy posts in the new Provincial administration. Many of these have obstructed
Soong's efforts toward reform and bandit suppression. In addition Chang Fa-kuei,
the superseded Headquarter's Director, has endeavored to undermine Soong's position.
Chiang Kai-shek has attempted to placate Chang Fa-kuei and recently has induced
him to leave South China for an honorary, albeit ineffectual, post in Nanking.
Hong Kong has become a center of anti-Kuomintang propaganda and operations.
The political refugees of Hong Kong have had a strong influence on powerful elements
in South China. That Soong regards the activities of these groups as troublesome is
disclosed in the fact that he recently initiated calls on two former Kuomintang leaders
who are powerful advocates of a coalition government composed of liberal elements
and Communists. Subsequent activities of those persons indicate that Soong was un-
successful in his efforts to bring them back into the Nationalist fold. It is also possible
that Soong, in his contacts with these dissident leaders, was endeavoring to secure their
cooperation and support, with a view toward the establishment of an independent
regime in South China in the event of the collapse of the National Government. It is
unlikely, however, that Soong will be disloyal to the Nanking regime so long as it re-
mains fairly effective and is the internationally recognized government of China.
A serious obstacle in the way of political stability in South China stems from power
politics within the Kuomintang. The ultra-conservative CC Clique is active in Kwang-
tung and has been interfering with Soong's Provincial administration. The recent
anti-British disorders in Canton are reliably reported to have been inspired, at least
in part, by representatives of the CC Clique for the purpose of embarrassing Soong.
This group has also been exerting pressure for economic advantages in connection
with Soong's plans for industrial development of the region.
Another source of difficulty with which Soong must cope is the attitude of the
other provincial governors in South China. In particular, the governors of Hunan,
Kiangsi, and Kweichow are supporters of General Chen Cheng, former Nationalist
Chief of Staff, who has been unsympathetic toward Soong's activities in the South.
The establishment of close ties between the economies of Kwangsi and Kwangtung
is part of Soong's pans for' the economic development of the region, but leaders of
the former province have always been characterized by a large degree of independence
and intractability; the present Governor is a carry-over from the old war-lord regime
and has been reported hostile toward the National Government. In Yunnan the
war lord Lu Han is once more in authority and is unlikely to cooperate in any plan
which will sacrifice his provincial powers to the National Government.
The possibility of maintaining political stability in South China in the event that
active fighting spreads to areas throughout the Yangtze Valley cannot be appraised
without consideration of the refugee problem that would inevitably accompany a
Communist military advance into Central China. A considerable number of home-
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less, restless, and unemployed people, with dialects and customs strange to the South,
would pose a serious problem of internal security to Soong and the National Govern-
ment.
Even though Soong possesses uncommon talents for business and administration,
it seems most doubtful that he can go far enough toward reconciling the interests of
the many diverse groups now working against each other and consequently against
the National Government.
4. PROSPECTS FOR MILITARY SECURITY.
The basic reason for the Chinese Government's present emphasis on the economic
possibilities of South China is its isolation, in terms of distance and poor communica-
tions, from currently active theaters of civil hostilities. In planning for the economic
development of South China, the Government is undoubtedly assuming that it can
continue to exist even if North China were lost to the Communists and Central China
becomes the principal combat zone. Yet, in addition to the economic and political
weaknesses described above, military limitations make it questionable whether the
National Government could assemble and maintain in South China sufficient armed
power to effect continued resistance against the Communists. Internal security prob-
lems posed by bandits and malcontents combined with pressure from the Communist
Army would require that the National Government support in South China a military
establishment quite beyond the sustaining capabilities of the area.
That this region even now has serious problems in maintaining internal order
can be seen in the fact that in several provinces Gov. Soong has had to place "bandit
suppression" before industrial development. These bandits, some of whom are already
oriented toward the Communists, represent the nuclei of valuable potential Communist
troop strength. It is believed that Communist organizational cadres and fifth column-
ists have already infiltrated the area and have begun to lay the groundwork for mili-
tary actions. The Nationalists, who at the beginning of 1948,. had only 70,000 tactical
troops in this sector, have been largely unsuccessful in recent local conscription
drives.
It is obvious that if the National Government is to mobilize South China as a
bastion of anti-Communist resistance, it will be necessary for them to evacuate into the
area a considerable portion of the approximately 1,000,000 Nationalist combat troops cur-
rently in the area between the Yangtze and the Yellow Rivers, as well as part of the
625,000 combat troops in North China. Several factors militate against this. In the first
place, Nationalist military command has typically shown reluctance to abandon any city
or region occupied by Nationalist troops even when it is tactically feasible to do so. This
reluctance stems, at least partially, from the belief that the denial of these places to
the Communists fulfills as great a strategic end as could be served by the deployment
of these troops in other sectors of China. Secondly, the difficulties involved in ,either
overland or waterborne transportation would place severe limits on the number of
men and the amount of materiel that could be transferred. Thirdly, the maintenance
of a large active army is, as indicated, beyond the present or anticipated food and in-
8 SET
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dustrial capacity of South China. (This is especially true if South China is deprived of
the resources from the rest of China which, conversely, become available to the Com-
munists.) Therefore, it is unlikely that the Nationalists will choose to evacuate or,
when pressed, be able to evacuate, any significant number of tactical troops from
present combat zones. They will probably continue to garrison important cities and
main rail lines while the Communists envelop, such pockets, isolate and destroy in-
dividual units, disrupt communications, and continue their economic pressure on the
Nationalists, thereby gradually reducing the latter's capabilities of resistance through-
out China.
On the other hand, the continued and effective resistance of Nationalist armies
supplied from South China depends on substantial shipments from overseas: rice from
Southeast Asia, coal from Indo-China, food and industrial materials from Taiwan, raw
materials, manufactured goods, and possibly military supplies from the United States.
It is likely, then, that the Nationalists will attempt, at all costs, to control the areas
along the South China coast.
If the Communists should halt their advance north of the Yangtze in order to
consolidate their gains before launching a general military movement into South
China, the Nationalists in South China, because they possess very limited capabilities
of sustaining resistance to existing internal pressures and inevitable Communist
attack, would still require external support.
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c?,
DISTRIBUTION
The President
Secretary of State
Chief of Staff to Commander in Chief
Secretary of Defense
Secretary of the Army
Secretary of the Navy
Secretary of the'Air Force
Executive Secretary, National Security Council
Chairman, National Security Resources Board
Chief of Staff, US Army
Chief of Naval Operations
Chief of Staff, US Air Force
Director of Plans and Operations, General Staff, US Army
Deputy Chief of Naval Operations (Operations)
Director of Plans and Operations, US Air Force
Special Assistant to the Secretary of State, Research and Intelligence
Director of Intelligence, General Staff, US Army
Chief of Naval Intelligence
Director of Intelligence, US Air Force
Secretary, Joint Chiefs of Staff
Secretary, Joint Intelligence Group
Secretary, State-Army-Navy-Air Force Coordinating Committee
Executive Secretary, Military Liaison Committee to the Atomic Energy Commission
Director of Security and Intelligence, Atomic Energy Commission
Chief, Acquisition and Distribution, OICD, Department of .State
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