FE Files, Lot 52–354
Memorandum by the Assistant Chief of the Division of Chinese Affairs (Chase)
Outline of Current Chinese Situation
Political
The political situation in China centers on the lack of internal unity. Such disunity is the result mainly of (1) the incomplete degree of [Page 58] unification which China, under the spur of Japanese aggression, had reached with the commencement of hostilities in 1937, and (2) the inevitable stresses and strains of long years of war for which China was politically, militarily and economically unprepared. The principal contending political groups in Free China are the Kuomintang, the Communists, and a heterogeneous group of dissident elements.
The Kuomintang (National Party), which administers, and in effect is, the National Government during the “tutelary” (pre-constitution) period prescribed under Sun Yat-sen’s program, still controls the greater part of Free China, though its effectiveness has been progressively weakened by the maladministration, disintegrating effects of the war, popular discontent, and political opposition. This party, which is headed by President Chiang Kai-shek, has manifested reactionary and totalitarian tendencies, but it includes liberal elements.
The Communists, adjusting their program to one of agrarian and “democratic” reform through which they aim ultimately to pass into a system of Marxian socialism, have established effective administrations in large areas, mainly in north China behind the Japanese lines. They are steadily gaining in material and popular strength as a result of strict leadership, sympathetic treatment of the peasants, and organization of resistance to Japan on a popular basis.
The dissident elements comprise various minor parties, liberals and provincial groups, concentrated largely in south China. While potentially important, they are weakened by lack of leadership and a clear-cut program and by diversity of interests.
An encouraging factor is the fact that both the Communists and the dissident elements have thus far recognized the National Government’s authority and Chiang Kai-shek’s leadership and that they join with the Kuomintang in supporting Sun Yat-sen’s Doctrine of the “Three Principles” (nationalism, democracy and people’s livelihood), resistance to Japan and the concept of national unity. There exist, however, fundamental differences centering on the manner of conducting the war and achieving political democracy.
Following a long period of deteriorating relations, which commenced soon after the “united front” agreement in 1937, the Kuomintang (Government) and the Communists have undertaken new negotiations for a settlement, assisted by the friendly good offices of Ambassador Hurley. The negotiations narrow down to a contest for power, with the Kuomintang seeking to protect its vested interests by ensuring perpetuation of its control, and the Communists endeavoring to safeguard their existence and desire for expansion. The Kuomintang, in its latest offer, has indicated a readiness to admit Communist and other party representatives in the cabinet; to establish a committee of three to consider reorganization and supply of [Page 59] the Communist army, with the Kuomintang and Communist representatives having equal status and possibly an American Army officer presiding; and to convoke a multi-party conference to consider interim measures of unification pending convocation of a national congress. This offer, involving some concessions by the Kuomintang, appears to have been rejected by the Communists, who assert that it would mean retention of one-party government and that Government’s control of Communist troops. It seems clear that the Communists are above all unwilling to subordinate their army to the existing government and that they maintain as their main desiderata the immediate ending of “one-party (Kuomintang) government” and its reorganization into a “democratic coalition” in which they would be assured a full voice. The Communist representative at Chungking has recently stated to Ambassador Hurley the opinion that the Chinese delegation to the San Francisco Conference should include representatives of the Communist Party and the Democratic Federation (of minor parties).
The dissident elements, including liberal elements in the Kuomintang, have also been working for establishment of a coalition government and for other “democratic” reforms, but it is not clear to what extent they have established a basis for collaboration among themselves and with the Communists. Meanwhile the situation is further complicated by the puppet Chinese governments and forces set up by the Japanese. Puppet China is filled with pockets of Communist guerrilla resistance, and one aspect of the fundamental struggle for power between the Kuomintang and the Communists is the competition to win over puppet troops which is already in evidence and is certain to become increasingly important as the Japanese are driven from China. The only hope of preventing further disunity and eventual civil war will lie in the creation of a democratic framework within which the opposing groups can reconcile their differences on a political level.
China’s disunity is of vital concern to the United States. It seriously impairs the war effort, prevents effective military coordination, and diverts Government and Communist troops from the fighting fronts. From the long-range standpoint, it endangers prospects for China’s fulfilment of her needed role as a principal stabilizing factor in East Asia. While Russia lends no direct material support to the Communists, the latter unquestionably derive indirect moral support from Moscow. There have been unmistakable indications that Moscow distrusts the Chinese Government and strongly approves the Communists’ position. If Russia enters the war or if an open break between the Communists and the Kuomintang occurs, Russia may be strongly tempted to intervene in support of the Communists and to [Page 60] assist them to establish an independent pro-Soviet state in north China or Manchuria. In any event, a China divided or hostile to any one of the other powers would be a constant invitation to international intrigue. Our principal political objective is a strong, stable and united China, which will throw its full strength into the war and which will cooperate whole-heartedly in the maintenance of peace and security.
While the fundamental differences between the Communists and the Kuomintang render the achievement of unity very problematical, recent developments indicate that Chiang is becoming increasingly aware of the urgent need for remedial action and that the situation is not without hope. A more considerate attitude toward the Communists had been evidenced by concessions toward conciliating them, by withdrawal of some of the Government troops assigned to watch and blockade them, and by authorization of the shipment to them of medical supplies. Gestures have been made toward meeting Soviet desires in Sinkiang and improving general relations with Russia. T. V. Soong,88 and other progressives have been given posts of influence in the Government. A habeas corpus act and more liberal censorship regulations have been enacted. Chiang has given more specific assurances of the early establishment of constitutional government long postponed by the Kuomintang, and greater latitude has been allowed the People’s Political Council (popular advisory body). The Government has made encouraging response to the recent appointments of Hurley, Wedemeyer and Nelson and is actively cooperating with their efforts and programs. This has already brought an improvement in the military, supply and economic situations (discussed below), which in turn has raised morale and created a better atmosphere for political reorganization. Such developments are only a beginning, however, and there is still serious danger that they may be too little and too late to save the Government from collapse or China from civil war.
Military
For seven and a half years China, at the cost of incredible privations, losses and handicaps, has resolutely resisted Japanese invasion, rejected repeated peace offers by Japan, and held down a large part of the Japanese army. This in itself has constituted a significant contribution to the war effort which should be kept in mind in evaluating the Chinese military picture.
Following the capture of Canton and Hankow by the Japanese in 1938, which climaxed Japan’s initial drives and left her in control of sufficient ports, industrial areas and communications to ensure an [Page 61] effective blockade, the Japanese for several years deferred the difficult task of extending their lines into the generally mountainous interior and confined their activities mainly to consolidating their positions and to occasional raiding expeditions for the further disruption of Chinese economy.
In 1944, the Japanese, faced with certain loss of their Pacific empire and the necessity for preparing for a final stand in China, resumed major operations, which substantially advanced the Japanese lines in central and south China, brought the vital north-south rail trunk line from Peiping to Hong Kong rapidly under Japanese control, forced abandonment of valuable American air bases in east China, and threatened the capture of Chungking and Kunming.
These operations were, with few exceptions, ineffectively opposed by the Chinese and only retarded by brilliant work on the part of American air forces. They served to limelight deplorable conditions in the Chinese Government and provincial armies, inherited from the “war lord” period and aggravated by the strain and privations of war, but attributable in large part to gross mismanagement and neglect. Such conditions included conscription abuses, neglect of training and discipline, incompetent leadership, underpay, shocking undernourishment and lack of medical care, defective and confused organization, personal allegiances, nepotism, graft, smuggling, oppression of the people, sickness and low morale.
These events and revelations produced a storm of criticism, brought home to Chiang Kai-shek the danger of his Government’s collapse under internal and Japanese military pressure, and resulted in constructive efforts being made to reorganize and improve Chinese military forces. There also developed encouraging cooperation with Lieutenant General Wedemeyer, newly appointed Commander of American Forces in the China Theater, and with the Nelson mission.
Chiang has appointed as Minister of War a capable officer89 who is very cooperative with our Army. A program for streamlining the Chinese Army and providing it with more adequate pay and food has been announced. The Nelson mission has brought about establishment of a Chinese War Production Board and War Transport Board, which, vested with over-all powers to direct and coordinate and actively guided by American experts, are drastically reorganizing the military production, supply and transport systems. Chinese Army Headquarters have been reorganized and transferred from Chungking to Kunming, a natural base of supplies and center for cooperation between Chinese and American forces. A new Services of Supply for the Chinese forces has been set up at Kunming, directed, in effect, [Page 62] by an American officer.90 Chinese troops south of the Yellow River are being regrouped to form a more effective force for offence. The training of Chinese personnel by the American Army is being accelerated. American officers and experts are being placed in key positions, and consideration is being given to establishment of a united high command, presumably headed by an American, which would coordinate operations of American units and Chinese forces, including, if possible of arrangement, the Communist army. All these developments reflect increasing cooperation by the Chinese Government with American efforts directed toward welding the Chinese armies into a compact striking force capable of playing a major part in driving the Japanese from China.
These developments, together with some improvement in domestic production of military supplies brought about by the Chinese WPB, an increasing flow of American military supplies resulting from expansion of our army air transport service and opening of the Ledo-Burma Road, and a cessation of Japanese advances toward Chungking and Kunming, have helped to restore morale and improve the picture considerably. Against such improvement, however, must be set the time limitations in the tremendous task of vitalizing the Chinese armies, continued advances and intensive consolidation by the Japanese in east China and along the coast, Japanese capabilities for further westward advances, and China’s political disunity which prevents unification of Communist and independent forces with those of the Government.
Russia’s entry into the war and American landings on the China coast would of course alter the whole picture and improve it greatly from a military standpoint. At the same time they might well complicate the political situation owing to the presence of Chinese Communist forces in strategic areas in the path of the Russian Army’s advance on the coast.
Economic
Background factors. China entered the war with undeveloped industrial and transport systems which were extremely inadequate for the needs of modern war. Owing to the incomplete state of China’s unification, Government control and direction over the internal economy have been very difficult. China has been under rigid enemy blockade through which little war material and almost no consumer goods have been able to pass. China’s industrial areas and key transport systems are in enemy hands and have been for a number of years. Such industrial production as Free China has been able to maintain has been carried on with the limited equipment that could [Page 63] be moved from coastal points to the hinterland or improvised from meager resources. The Japanese have done everything within their power to destroy the value of Chinese currency, and they have confiscated the major assets of the Chinese Government and its sources of revenue in occupied areas. The Chinese have had to resort to very large note issues in order to carry on the war.
Present situation. As might be expected, under these circumstances and the strain of seven and a half years of war, China’s economy is in a precarious condition.
The country has been suffering from serious inflation. Current prices are at levels several hundred times higher than those in the pre-war period. The Chungking retail price index registered an advance of 225 percent in 1944. Prices were estimated to have risen 35 percent during the last quarter of 1944 and a further 20 percent during January 1945. Note circulation increased by more than 150 percent in 1944 as compared with 120 percent in 1943. The total note issue at the end of 1944 was approximately 190 billion as compared with about 1.8 billion in 1937. As this phenomenal rapidity of increase suggests, note issue is the principal means by which the Government has covered recurring deficits, and the progressive expansion of currency is likely to continue until the war is over and a stable economy is restored.
The primitive agricultural character of China’s economy, which is on a close to subsistence basis and produces mainly for immediate consumption, together with a fortuitous series of good crops, has served to mitigate the effects of this inflation, and, thus far, has prevented an economic collapse. However, the inflation has entailed great suffering for the salaried classes, seriously affected the people’s morale, and greatly aggravated the nation’s political and military difficulties. It has had disastrous effects on production because manufacturers have been unable to dispose of their products at prices permitting a restocking of materials. This has stimulated hoarding and speculation, which in turn has aggravated the inflation. It has also encouraged trading with the enemy, which in general involves the exchange of Free China’s essential products for non-essential goods from occupied areas.
One of the most serious causes of the scarcity of consumer goods, however, and one of the most fundamental factors in China’s economic distress, is the bottleneck in transportation, which results from the deterioration of the country’s inadequate transport facilities and controls, and which has greatly impeded the distribution of raw materials, food and other consumer goods.
China’s present economic problem is basically a war problem and major relief cannot be expected before the opening of coastal commercial [Page 64] marts and the clearing of the enemy from Chinese soil. Foreign credits, inconvertible in goods, will not help the present situation. Practical remedial measures center on improvement of the production, supply and transport systems. It is in these fields that action is now concentrated, and such action is largely directed toward assisting China to maintain and improve her war effort.
Under the general supervision of Mr. Nelson and empowered with the necessary broad directives from President Chiang Kai-shek, a group of American experts, working in cooperation with well qualified Chinese officials, have set up a Chinese War Production Board to organize and stimulate China’s industries and war production. For the first time, a serious and constructive endeavor has been made to coordinate the Chinese economic war effort. It is expected that there will be a substantial increase in Chinese war production, and this should have a very salutary effect on China’s war effort and bring about some improvement in her economy.
A parallel program for the reorganization and coordination of transport is also being carried out under a newly established War Transport Board, which is closely coordinated with the American Army and guided by American officers and technical experts. In connection with this program, trucks bringing in supplies over the recently opened Ledo–Burma Road are being turned over for use in China and are thus serving to replenish China’s badly depleted motor transport facilities.
Increased production in China, in conjunction with the reopening of the Ledo–Burma Road and the construction of the Calcutta–Kunming oil pipeline, should greatly improve China’s supply and transport system. But even more important, a concrete increase in China’s war production may be expected to strengthen the morale of the Chinese people.
While present concern centers on the war effort, it is hoped that it will lay a basis for postwar economic cooperation between the United States and China so necessary to China’s agricultural and economic rehabilitation. Though there has been a definite trend in the Chinese Government toward state-controlled and ultra-nationalistic economy, recent developments point to a reversal of that trend. Our principal long-range economic objective with respect to China is the development of an integrated and well-balanced Chinese economy and a fuller flow of trade between China and other countries. Toward this end we hope that China will institute reasonable policies calculated to encourage legitimate trade and enterprise.