CO537-4849 — Page 23

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coming from Malaya, Siam, Netherland East Indies, Indo- China and the Philippines. Despite Left-wing claims that the school was an "Institute of democratic ideals" it had become increasingly clear over the last six months that it was being used primarily for political ends, and was actively spreading seeds of Communismall over South East Asia. The Principal who had, when the school was established, given a written undertaking not to permit political education, left hurriedly for the "Liberated Areas" as soon as he learnt, late in December, that this Government was making enquiry into the activities of the school. As a result of this incident local Communists are likely to be even more cautious in their activities.

4.

In the last three or four months over fifty of the leading "Democratic" figures taking refuge in Hong Kong have departed for North China, and it is believed that in the next few weeks a number of other important Communists and "Democrats" will also leave for the North in order to be present when important political events take shape. The departure of these persons does mean that should the Communists definitely go underground in Hong Kong, the deck is cleared for action, and the main figures are out of the way.

5.

K.M.T. prestige continues to decline, and very little is heard of the activities of the local Hong Kong branch. The business men and merchants here formerly anxious to be associated with the K.M:T. are now seeking to clear themselves of connection with the K.M.T. in order to improve their hopes of being accepted into the future Communist society of China. Among the prominent Nanking officials who came to Hong Kong during February are Dr. WEI Tao-ming, until recently Governor of Formosa, and his wife; 0.K. YUI, former Minister of Finance and Mrs. TU Yueh-sheng, wife of the notorious Shanghak gangster-politi- cian, and two of her sons. Dr. T.V. Soong is still in the Colony, and has received a number of visits from high Chinese officials, including HSU Kan, the present Minister of Finance, and K. Y. Liu, Governor of the Central Bank. Dr. Soong seems to be keeping his finger in the pie, although he has publicly declared that he has retired from active participation in politics. There are reports that he may soon leave for Europe.

6.

With hopes in the successful outcome of the peace negotiations rising, increasing interest is paid in local commercial circles to the prospects of opening up trade with Communist China. In the meantime the volume of shipping from Hong Kong to North Korean ports, and also to Communist ports in North China is increasing, though mone of the well-established shipping lines have so far taken part in it. The trade remains purely on a barter basis. One ship clearing for North Korea recently carried in its cargo an interesting item in the shape of a large quantity of bank-note printing paper, which may go to produce Chinese Communist currency. The local press have also been taking interest in trade with Communist-controlled China, and the Marine Department was recently asked by reporters whether clearance can be given for Communist-controlled ports. The Director of Marine cannot refuse to give clearance for any port outside Hong Kong. It is generally believed that a number of ships which have cleared for North Korea have in fact called at Chefoo or elsewhere in Shantung. The Chinese Communist authorities have found a subtle way of acquainting others with the conditions under which trade with "Liberated Areas" can be carried on by arranging for the regulations to be published as a supple- ment to the English-language fortnightly magazine, the

SECRET.