INTELLIGENCE HIGHLIGHTS NO. 51 11 May - 17 May 1949

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-01082A000100020010-7
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 9
• Document Creation Date: December 12, 2016
• Document Release Date: June 13, 2001
• Sequence Number: 10
• Publication Date: May 17, 1949
• Content Type: PERRPT

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Comer no 1
PAR BAST/ACIFIC BR. R
OWICS OF REPORTS ) SBTIiAT1
CENTRAL I1 LLIO S AOS1iCT
WU9 j This document is a working paper, NOT
an official CIA isesuance j, and has not necessarily
been coordinated with other ORE producing oon-
ponente ? It represents current thin ng by one
group of specialists in CIA and is designed for
use by others engaged on similar or overlapping
studies. The opinions expressed herein may be
revised before final and official publication.
It is intended solely for the information of the
addressee and not for further disseminationo
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b
N CHANCE IN CLAS
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ASS. CHAWSED TO: TS S C
NE;CT REVIEW DATE:
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DATE. F;i` ~--~T' _EVIENER:
~y
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Or REPORTS AM) ES I LTA 1 :, CIA
FAR EAS T/ ACIF'I C B~'A! CIS
INIELLIGENCE IIIGHl,IGfM NO. 51
11 !ay - 17 May 1949
SECTION I- S t1 MAflY OF FAR EAST ME MS MM I LOPM M
The US proposal to halt further Japanese reparation payments is
expected to meet strong opposition from other FEC member-nations (p. 2).
Despite British strengthening of Hong Kong's defenses, no Chinese
Communist attempts to seize the Colony are foreseen in the near future
(P+ 3).
The problem of gaining Korean endorsement of the Intended US troop
withdrawal has been increased by the recent defection of a Coast Guard
vessel (p. 3). Meanwhile, President Rhes has postponed action on Korean
land reform by returning the bill to the National Assembly (p. 4)0'
In China the Communist military advance not only continues but
appears to have accelerated and thy;, possibility of a direct thrust down
to Canton now exists (p. 4). In the face of this threat
the refugee
,
Nationalists there are debating ithere.next to move the remnants of their
government (p. 5)?
Commonwealth aid to the Burmese Government may well, bo used for the
suppression of the insurgent Karens, rather than for recto ,tion of order
through negotiation (p. 7).
Slow but definite progress in committee talks at Bat avLaa indicates
that a solution to the Indonesian problem is still a possibility (p. 8).
m mar-RU-137 nrrtta ar:? usv in suacaedfzzg secst Dees of this"T:~e ;
("A", "B", or "C") indicate the importance of the items In B/ E opinion
..r" 4-1,, It A M --- -- _ _-.ir _ .1 ._ .
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SECTION II. DEVELOPMENTS IN SPECIFIED AREAS
M halts. Ja nose rs arations?-- he Par Eastern Commission, last week, "A"
ear a proposal .a , urther Japanese machinery and equipment
removals for reparations and to lift all restrictions on the levels of
Japanese Industry. Simultaneously, SCAP received an order to halt all
remaining shipments planned under the "advance transfer" program, from
which China, Great Britain? the Netherlands and the Philippines have
received approximately 62,000 tons of former arsenal equipment.
In justifying the proposal, the US pointed out that reparations
have been predicated on the assumption that facilities to be removed
as reparations would be surplus to Japan's peaceful needs,, Since Japan
is facing a tremendous task in attempting to achieve a self-supporting
economy, it is the US view that further reparations would make this trisk
even more difficult,, if not impossible* It was further pointed out that
the US is spending 500 million annually for relief and rehabilitation
in addition to occupation costs, and that foreign aid programs would be
jeopardized if the burden of Japan continues to fall upon the US.
This latest US move is the culmination of a series of decisions
gradually liberalizing the US reparations policy. In 1946, the Pauley
Commission (concerned more with reducing Japan's war potential than with
economic rehabilitation) recommended removals valued prewar at $740
million. In early 1948, the Overseas Consultants reduced the Pauloy
recommendation to $495 million and the Johnston Committee, in May 1946,
further reduced it to *200 million.
FEC's continuous failure to agree on such basic issues as the'
division of reparations among claimant nations, the position of such
external assets as seized plant in Manchuria and allowable levels of
industrial recovery, has adversely affected Janan's econom:.o stabili-
zation because industries Whose plant was slated for reparations removal
have hesitated either to undertake capital improvements or to reconvert
for peacetime production. However, since about 70% of the equipment
earmarked for reparations is presently in use, the immediate effect upon
Japan's production index will be slight until enough raw materials are
available to de .and the use of the additional equipment. ievertheless a
removal of this deterrent to Japan's recovery should prove to be of
immediate psychological value in 'US efforts to revive the country's
lethargic economy.
Vigorous and sustained opposition to the new proposal can be expected
from the majority of the FF.C memberst, especially from Australia, Chins and
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the Philippines? The Philippiriea'' Department of Foreign Affairs has
already drafted a note of protest for submission to the FFC, and the
Australian Secretary for External Affairs has expressed criticism of
the "unilateral action of the US in defiance of the views of the major-
ity of tha FEC." In view of the intense feeling on the subject, the US
probably will be forced to use its veto power in order to effect the new
policy.
Future of H 2M Kong--That the Chinese Communist Party will probably
reopen the ong; hongg question and demand that the UK return :long Kong
arr.' Kowloon to China can be anticipated, since the CCP does not regard.
t m. "unequal treaties", by which the UK acquired possession of Hong E :.as
an.' a 99-year lease on the "'iew Territories, as valid and considers th.e
British foothold in Hong Kong an affront to Chinese nationalism. The
British, in turn. have made it clear several times since V-d Day that
they do not intend to relinquish the. Colony. On 5 tray, the UK Mininter
of Defense stated in Commons that substantial reinforcements were being
dispatched to Hong Kong,
It is improbable that the CUP will order an assault on Hong Kong
in 1949, since a stable Hong Kong under British control offers the Com-
munists great advantages in foreign trade. These advantarres, however,
will not outweigh Communist nationalistic sentiment in the long run and
the return of Hong Kong to China, either through negotiation or military
action,, will probably occur within the next few years a
Ship defection adds to Rhce's woes--A week after the 5 May defection of
csrep-MlIc roops t ewTar h, one of the Republic's larger Coast
Guard vessels sailed into the northern Korean port of Woneonc The vessel
is one of sixteen 26Q--ton YMS craft turned over to the Korean Government
by the 1TS?
Lose of this ship will further complicate the already knotty problem
of gaining President P.hee's assent to early US troor withdrawal. The
Coast Guard is the weakest arm of the Korean Security Forces and Rhee
feels that additional ships and equipment from. the US are a necessary
prerequisite to troop wi thdrawal0 Furthermore, considerable pressure,
not all officially inspired, is being exerted in Seoul to postpone troop
withdrawal until: 1) Korean defensive power is more fully developed;
2) Soviet withdrawal from northern. Korea is more certain; and 3) the US
concludes an alliance or military pact with Korea offering positive
military protection.
In view of the demonstrated disloyalty of elements in the Coast
Guard and Army and in the absence of positive US guarantees of Korea's
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security, it will be most difficult for Rhee to convince the Korean
people that the Security Forces have developed to the point where it
is now possible to establish an early date for the withdrawal of US
troops,
Rhee sends land bill back to Assembly--The long;.-sought-for Land Reform "Cr
Bill, passed recent y by the atianal Assembly of the Republic of Korea,
was returned to that body by the State Council (Rhee*s executive cabinet)
for further work on suggested amendrmrents. Since the augpeations -were
minor in nature, a hint an to Rheees real reason for? delaying implemen-
tation of the Bill may be seen in his specific recommendation that effective
date of the law should not be the date of the Aasemblyea "passage," but the
date of the State Council's "promulgation," Whatever the motive, delay can an
issue as important as the Land Reform 13i11, while pleasing to Korea's
conservatives, will not win friends for Rhee among politioally aware
farmers. Nor will it weaken the Communists' attack against existing land
conditions.
The Land Reform Bill, which provides for the sale to farmers of
some 1,800,000 ass presently held by absentee landlords, is expected to
reduce farm tenancy from 73% at try'-Day to an estimated 10%. Payment to
the landlords will be made immediately in negotiable bonds equivalent in
value to the installment payments (in kind) to be made over a period of
years to the Government by the purchasing tenants. Land holdings are
restricted to a maximum of T$ acres per farm family, with certain special
crop fields (orchards, mulberry, and vegetable gardens) exempted.
Communist advance continues-The current Communist offensive rolled for--
ward on a fronts last wcek and appeared to be on the verge of a new
series of succeassen Hankow has been taken. Shanghai is it imminent
darner of capture, and there are numerous reports that a thrust deep
ir,tc south China is developing rapidly.
Despite "fierce" resistance by the Nationalist defenders, Conmunirt
forces continue to move artillery, additional supplies and forces into
position around Shanghai and have all but isolated the city. Although
they are now within artillery range of the vital Whangpoo River, sole
remaining sea-outlet from the city, they have not yet begun to shell
river shipping. Food and fuel stocks within the city, adequate until
mid-June, are not present cause for alarm. Once the sea approaches are
out and ECA shipments belted, however, the isolated city will face eco-
nomic strangulation if it does not first fall militarily. High ranking
Shanghai leaders are said to expect that the Nationalists will abandon
"A"
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Shanghai in the near future. They envisage a "Dunkirk" evacuation from
the south banks of the Yangtze, east. of Woosung. The successful reen-
act anent of Dunkirk seems unlikely for the Nationalists would first have
to stabilize the situation west of the Nhangpoo River, a remote possi-
bility. Although subject to some modification from other than military
factors, Communist occupation of Shanghai should occur by the end of the
month. or shortly thereafter.
Meanwhile, according to censored news releases from Shanghai, the
Communists are pushing south and southeast from the Chekiang-Kiangsi
Railroad and have driven as far as Nigtu and Juiohin (Communist oapi:31
its 1931) some 230 miles from Canton in southeast Kiangsi, and "enoiro::ed"
C'ienyang, in northwestern Fukien, 120 miles from Foochow,
From presently reported positions, Communist General LIU Po-oheng
cculd launch a two-pronged drive southeast to the Fukien coast, and south
into Kwangtung---joining forces with Communist guerrillas now holding broad
stretches of rural Kwangtung--and thence to Canton, or veer southwest and
west to menace the retreat of PAI Chung-het and out him off from his poli--
tioal and economic base in Kwangai. It is still too early to discern
exactly where LIUts main effort will be directed, but present indications
suggest Canton. LIU's exact whereabouts for past months have been some-
thing if a riddle; it has long been expected, by neutral observers and
Communist propagandists alike, that LIU and his guerrilla forces would
lead the eventual Communist push into South China. If LZU is on his way
to Xwangtuang, the emergence of any anti-Communist resistance in south
China or unity of anti-Communist efforts elsewhere in China is severely
threatened,
Nationalists debate flight from Canton--Frightened by the possibility
o a Communist drive on Canton and confused by disastrous factionalism,
Nationalist officials are discussing where to go next. Hitherto, right-
wing leaders have given first consideration to Thwian. already prepared
as a final Nationalist refuge. However. growing fear that such a move
would bring withdrawal of recognition by foreign powers is causing reex-
amination of this course. Acting President LI*s following, moreover, is
more directly concerned with southeast China than with Taiwan. While LI's
primary interest in Kwangsi might point to Kweilin as a possible future
center of resistance, Chungking is likely to be first choioe for various
Nationalist leaders, Although the Nationalists might then attempt to
exploit the analogy of the movement to Chungking during the Japanese War,
actually such a move probably would hasten the downfall of Nationalist
China.
Meanwhile, Acting President LI reportedly is preparinr for a show-
down with CHIANG Kai-shek over implementation of the latter's assurances
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of non-interference with the Government, Although CRIANG sent a letter
to Premier MO Yinp-chin in answer to LI's request for actual control of
governmental resources, nearly all the statements made therein were
general and indicated CHIANG's refusal to yield actual power despite
his present intention not to resume office. However, IS reportedly
plans first to revamp the cabinet and then order shipment of the Govern-
ment's rold reserves from Taiwan to Canton, Apparently aware that Taiwan's
Governor., CHEN Cheng, is unlikely to comply with this instruction or yield
his office to a now appointee (such as Still Tai-jen), LI has asked for US
support in effecting CHEN's removal.. Should LT carry on the struggle in
this fashion, the Nationalist split may soon be irreparable.
LI's apparent intention to appoint YEW Hsi.-shah or CHU Cheng to head
a new cabinet further evidences the low level of Nationalist political
fortunes. YEW is the refugee ex-?warlord of Shansi, with a long record of
antagonism to the National Government and little present influence except
possibly with certain Kwangtung generals.. CIH1 Cheng is a colorless Kuomin-
tang elder, long President of the Judicial Yuan, Despite 110 Ying-chin's
continuation in the Defense Ministry and the probable appointment of 'Ail
Chung-hsi as Chief of Staff, the new cabinet, if organised, will be even
less effective than is the present one.
Moderate economic policy in Pei inVmComnunist sincerity regarding the "C"
"shift to the cities reconstruction program, announced for North China
in March, 1949, is now fairly evident as a result of Party actions and
directives during April. On 23 April, the Peiping Municipal Committee
of the Chinese Cos unist Party (CCP) held a meeting with "factory mana-
gers, company managers, military representatives and labor union direct-orss,"
in which the new economic program was endorsed, application of the policy
was discussed and party workers were warned in strong languar*e against any
deviation from the program by "mistake or pre judice." PENG Chen, Secretary
of the Municipal Committee, promised that the government would protect
privately-'owned industries and improve marketing conditions, PENG also
stated that industry would be "directed" by the principle of "lighter
taxes for industries than commerce, for heavy industry than light, and
for manufacturers of daily necessities than for makers of luxury goods.,"
He concluded by assuring the meeting that, according to Chairman MAUgs
directive, the CCP must "allow profit for both capital and labor and
maintain good relations,,.. with foreign countries."
The action of the Communist Ministry of Industry and Comerce regard-
ing the Kailan Mining Administration (KMA) is a further significant indi-
cation that CCP political prejudices are subordinate to economic objectives
at present. To insure profitable operations for the part-British firm, the
Cc? promised decreased taxes, more transportation, pit props from Mar:olaaria
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and a disciplined labor force. This attitude appears to be a direct
result of the March policy, since the Communist radio proudly broad-
cast that this was a f4typioal solution" of industrial problems in
North China, and completely in accord with MO's principles.
Commonwealth aid problems--The Pritish Embassy in Rangoon has stated
s the nature of the Commonwealth aid promised to Burma is still un-
dtoided, but indicated that it would be mainlyy arms and military equip-
ment. No long-term financing is contemplated, although a small inorcase
in currency issue is still being considered. MM.eanwhile, the Burmese
~ta.ve been led to believe that Commonwealth assistance will be immediate
and unqualified and are apparently planning to use the new arms to step
up actioA against the Xarens, contrary to the Commonwealth desire for a
negotiated Burman-Caren agreement followed by a major effort against the
Communists.
In view of this attitude,, any Commonwealth effort to impose condi-
tions offers difficulties and the Commonwealth appears to be taking a
calculated risk, If the Commonwealth reneges on its promise, an unfavor-
able Burmese reaction is certain. If it attempts to impose conditions,
on the other hand, bitter Burmese- resentment can be expected, especially*
among the military leaders. Yet unconditional arms supply to the Burmese
is likely to result in actions inconsistent with Commonwealth wishes and,
worse, much of the mat6riel might be turned against the Government either
through desertion of Government troops or insurgent raids. One alternative
which offers some slight hope of success, however, appears to be action by
the Commonwealth Ambassadors in Rangoon (who constitute the medium through
'which the aid program is to be implemented) to bring Jud''cious pressure
upon the Burmese Go ,ern ment to come to terms with the Karens by giving
only token assistance until the Burmans become more amexmble.
Meanwhile, unsettled conditions, coupled with the obvious weakness
of the Burese Government, appear to be encouraging seneratism among the
Shan and Kachin minorities who inhabit a large part of the north and north-
east. Leaders of these people recently met in Bahmo to consider measures
for self-protection during the continued disorders. These leaders have
always been suspicious of Burmese intentions towards them and are unenthusi-
aetie about their status in the Union of Burma, They are not only concerned
about their future security, but probably also believe that they hive con-
tributed far more to the Burmese Government than they have received in return,
4ie ICachin leaders who attended the meeting are reported to have agreed to
recruit two battalions for self-defense, while the Shan chieftains agreed
to strengthen their private armies. There is no indication that these
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forces would be incorporated into the Burmese Army, as proposed by
Priw,, Minister Thakin Nu and the T."inister for Kaachin Affairs in Rangoon.
Regional recruiting of this sort would be a severe blow to the Bur-
mese Government's present plans to raise 10 battalions of frontier peoples.
Purthermoru, while it seems unlikely that the Shane and Kachine will for-
mally secede from the Union, they will probably continue efforts to increase
their autonomy at the expense of the Burmese Government and further disas-
sociate themselves from the disturbances in central and southern Burma.
Progress in Batavia talks--Although obstacles stand in the ray of exeou-
ting the terms o the recent preliminary Dutch-Re publi c agreement, the
outlook in Batavia for settlement of the basic issues covering Republican
restoration and a cease--fire order is good. Committee "One", charged with
the problem of returning the Republican administration to the Jogjakarta
Residency, has made considerable progress. To date the major problem of
Committee "One" has been to schedule the evacuation of some 40,000 civilians
from the area. However, a statement by the Sultan of Jogjakarta, guaran-
,t;eeing personal and material safety for all individuals irrespective of
nationality, is expected to reduce the number of prospective evacuees
sharply. Actual evacuation may begin as early as 23 May. Committee "Two"a
charged with the restoration of "peace and order". has made less nrog;ress.
Dutch and Republicans both are anxious to accelerate the work of this body
and a Tt I (Republican Army) officer has been assigned as an advisor in
order to strengthen the Republican position.
Both parties are reported to be cooperating unusually well in carrying
out terms of the agreement. The majority of Dutch departments in Batavia,
contrary to expectations, are giving a strong measure of support to Van
Roijen, the Netherlands delegate. Dutch-controlled public information
organs, however, have been publishing statements which are likely to result
in misunderstandings between the delegations6 Van Roijen intends to correct
this situation and believes that if the expected progress on implementation
of the preliminary agreement can be continued during May and June, the con-
ference at The Hague on a formal agreement may be held in July.
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