229 Attlee to Chifley

Message LONDON, 22 December 1948

TOP SECRET In the light of the steady deterioration in the situation of the Nationalist Government, we have been considering the consequences of probable Communist domination of the whole of China, or, at any rate, down to the Yangste. The following is an outline of the position as we see it and of the conclusions reached.

I. The situation in China 2. The Nationalist Government have virtually lost control of the whole area north of the Yangtse, and it seems highly unlikely that Government forces will be able to stand their ground on the southern bank of the river in the face of determined pressure from Communist forces. The latter have the initiative now and are making an all out drive on Nanking, the success of which appears to be merely a matter of time.

3. Following on the Communist occupation of the whole area north of Yangtse, the political situation now seems likely to take one of two courses- (A) The disappearance of Chiang Kai-Shek, and, if the Communists are willing, some kind of coalition between them and elements of the Nationalist Government.

(B) An attempt by Chiang Kai-Shek to continue the war from Canton or elsewhere in China proper. This is compatible with Chiang Kai- Shek's present mood, but it is doubtful whether the essential quota of Government servants would be able, or willing, to follow him. He could only survive if he received American support on a much more extensive scale than anything so far undertaken.

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II. American Policy Toward China 7. The American policy is of course fundamental to an appreciation of the position. We believe that the United States Government intend to support Chiang Kai-Shek so long as he is supportable, by hastening deliveries of such supplies as they have contracted to make available under the Grant-In-Aid to China already voted by Congress. Meanwhile it is difficult for the State Department (and mutatis mutandis for the United Kingdom and other Governments) to avoid the dilemma that any public statement calculated to assist Chiang Kai-Shek by taking a relatively optimistic view would be concealing the true facts, while disclosure of the true facts would deal a possibly fatal blow to Chiang Kai-Shek's regime.

III. Political Effects 8. The political effect on neighbouring countries of Communist domination of the whole, and in a lesser degree of the northern portion of China would be felt in the following directions.

(i) Communist successes in China would encourage Communist movements throughout the area;

(ii) Contacts of Chinese Communists (and hence of Moscow) with Communists in neighbouring countries would be greatly facilitated.

Every country in the region would be affected directly or indirectly. The United Kingdom are of course immediately concerned with Malaya where the situation is complicated by the presence of a large Chinese population, and with Hong Kong, which seems likely to be the first non-Chinese territory to come into contact with the Communists. As to foreign countries the dangers to Burma and Siam are obvious, as are the possibilities of trouble in Indo- China and Indonesia.

9. The effect on Japan should also be taken into account. The spread of Communism in China would enhance the political and strategic importance of Japan as the most important non-Communist area in Eastern Asia, and seems certain to strengthen the determination of the United States Government that Japan should not fall under Communist domination.

IV. Economic Effects 10. In China it can be assumed- (i) That there will be an immediate period of dislocation when foreign commerce generally will be at a low ebb (ii) That there will follow a period in which the economic difficulties of the Communists may dispose them to be tolerant towards foreign trading interests (iii) That the present nationalist tendency towards foreign investments and capital installations will thereafter be enhanced, and that the intention to work rapidly towards the exclusion of the foreigner will be strengthened (iv) That there would be a tendency to subject foreign trade, both import and export, to closer Government control.

11. The most serious economic effects of a Communist controlled China in South East Asia seem likely to be:

(i) The probable increase in Communist inspired labour disturbances in South East Asia (ii) A serious refugee problem (particularly in Hong Kong, whose food resources would be strained to the utmost) (iii) Further disturbances in the rice producing countries (Burma, Siam and Indo-China) leading to a decrease in the production of rice, which would be of grave consequence to the importing countries of the region. A decrease in rice consumption would provide fertile ground for Communist agitation. This, together with general disturbances in other South East Asia industries, would further dislocate the economy and decrease the productivity of the area.

12. We shall be glad to learn whether our analysis accords with your own views. It is only possible to make a very general forecast at this stage, and each country affected will doubtless consider the situation from its own point of view. We feel, however, that continuing consultation on the situation will be helpful to all.

[AA:1838/276, 490/1/8]