Office of the Historian

893.00/5–1749

Memorandum by the Director of the Office of Far Eastern Affairs (Butterworth) to the Under Secretary of State (Webb)

[Washington,] May 17, 1949.

The most important aspect of the situation in Nationalist China is the continued failure of the leadership to unify its defense efforts. In the struggle between the Generalissimo and Acting President Li Tsung-jen, Li is demanding that the Generalissimo either resume office or give Li full control over the Government, all its armed forces and the gold, silver and foreign exchange now held by the Generalissimo. He also demands the Generalissimo’s departure from China and a cessation of Kuomintang interference with the Government. While the [Page 326] Generalissimo’s reply gives an appearance of agreement to these demands, his activities indicate no real relinquishment of his power. The prospect is a Nationalist China divided between the Fukien-Formosa (southeast coast) area under the Generalissimo and parts of south and west China under Li and General Pai Chung-hsi (Government commander in central China). Telegrams from the Embassy and the Embassy Office at Canton (Tabs A and B18) indicate that Canton’s fall is a matter of weeks and that there is little or no possibility of rallying the northwest and southwest areas behind a government removed to Chungking.

Economic deterioration continues. The Consul General at Shanghai reports (Tab C19) that the Generalissimo is stripping Shanghai of whatever assets, including technical personnel, that can be shipped out. ECA is endeavoring to provide a 30-day supply of foodstuffs and petroleum, based on its previous allocations, in order to ensure continued operations of public utilities and to lessen the possibility of serious disorder. It is persistently reported that the Generalissimo has ordered the demolition of utilities and important industries when his troops withdraw.

Increasing Communist difficulties are reflected in rising urban prices, poor prospects for coming harvests and shortages of goods. In their rapid military advance, now reaching into south China, the Communists are inheriting economic instability and the disruptions of the Kuomintang inflationary economy, highly aggravated in north China by their own food shortages. Communist efforts are handicapped by a dearth of technical and administrative personnel to administer urban areas and by lack of foreign exchange to enable them to import essential materials. As evidenced by their propaganda, they are bitterly hostile to the U.S. and reflect the usual Communist attitude toward U.S. and British “imperialism”, while ignoring Soviet actions.

The chief problems for the U.S. in this situation are:

1.
Recognition of a “Chinese Communist Government”.20 In the absence of any unified Communist government, this question has not yet arisen. In consultation with friendly governments, the U.S. Government is trying to maintain a common front on this question and forestall hasty action.
2.
Formosa21 Under the Department’s instructions, Mr. Merchant, Counselor of Embassy on special detail in Formosa, is proceeding to the U.S. for consultation. In the light of his recommendations, it may [Page 327] be desirable to seek revision of our present policy toward Formosa, as approved by NSC.22
3.
Withdrawal of U.S. Navy Forces at Tsingtao.23 Pursuant to Admiral Badger’s24 recommendation and with the concurrence of this Department, the Navy Department is authorizing Admiral Badger to withdraw his forces from Tsingtao about May 24, date of the withdrawal of Nationalist forces, or to withdraw” his forces when Shanghai falls if the latter city should fall prior to May 24.
4.
Pursuant to NSC 4125 regarding trade with Communist areas, plans have been completed for the application of the R procedure to govern exports to China. SCAP26 will apply similar controls over exports from Japan. The Department is seeking British cooperation in applying similar controls over British exports, but to date has had no reply from the British Government.
5.
Chinese Official Funds in the U.S.27 Discussions are being held with the Treasury Department regarding possible steps to prevent Chinese official funds in the U.S. from falling into the hands of the Chinese Communists or from being transferred to private accounts if the National Government should collapse. No decision has been reached.
6.
Removal of the National Government from Canton. If the Government should leave Canton, the U.S. Government would have to decide whether a diplomatic officer should accompany it to a new location.

  1. The former not printed; it was a weekly summary prepared jointly by the Embassy’s political section, the Military Attaché and the Naval Attaché at Nanking, No. 17, May 13 (893.00(W)/5–1349). For the latter, see Cantel 379, May 14, p. 316.↩
  2. See telegram No. 1656, May 16, p. 320.↩
  3. For further documentation on this subject, see vol. ix, pp. 1 ff.↩
  4. For further documentation on this subject, see ibid., pp. 261 ff.↩
  5. National Security Council.↩
  6. For further documentation on this subject, see vol. ix, pp. 1191 ff.↩
  7. Adm. Oscar C. Badger, Commander, U.S. Naval Forces, Western Pacific.↩
  8. February 28, vol. ix, p. 826.↩
  9. Supreme Commander, Allied Powers in Japan (MacArthur).↩
  10. See also vol. ix, pp. 729 ff.↩