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SECRET.
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SA GAI ADD ITS ENVIRONS
On the politic 1 side, the Comunist is the nigger in the woodpile in the SAG I area, It is definite that recently a number of Communist troops have infiltrated into the SI outskirts of POUTUIG and GJAO, and they exact squeeze on all comodities passing in and out of the town. There is a possibility that the intention is to seize SILANG AI should it be evacuated by U.S. forces, but it is inconceivable that the Nationalist Government will surrender this C nit: 1 of the Cheking Finnci 1 Group, for there is none economically more import nt then this group. There the rolitic1 centre of the country my have shifted, this group mint ins its activities with STANG ...I as the centre. Therefore, reling on the Communists' respect for U.S. power, it looks very much as if CHU CKING will try to kep U.S. forces in the YANGTSE delta until by negotiation, they get the Communist troops northward bound. CUCKING probably will be successful in getting them out of HIANGSU province, and the Chinese scon quite rosigned to North China and ANCURIA becoming the playground of the Corr unists. They realise, though that this concentration in the north means a consolidation of the party wita te Russins and that, in a year or so, there is likely to be a Communist counter-drive, backed by RUSSIA. That country's agents here re reputed to have stted that the Russian zore of influence in Chin.. ust extend as far as south of TOUCHO.
The stage appears to be set for third World er, but it must not be overlooked that the Con .unists are not so firmly entrenched in the provinces irredi tely north of the YANCISE river is they re in S. LIGI and KIAMASU. There is on awakuning consciousness that they are no longer, as onee they were, roving, non dic ngurogation that had no foothold in leg lity, and it is possible that the trend of party policy will be to concertr.te work and thertion on intern 1 consoli- dation over the area in which it is von a definite foothold.
An old Chinese custom is to stay well cway from trouble, and it is significent that number of well-known Chinese businessmen have not resppered to trade on the SHANGRI market. Superficially comitions look good,, there is a brisk local tradend money is circulating freely. But under- lying it all is a feeling of uncert inty. Something is going to lappen, but what it is neither foreigner no Chinese can say with any degree of certainty. Instability of the currency and the consequent absence of foreign trade, the uncert inty of labour troubles, the presence of Corr unist troops in KLANGSU and CHUNGKING appointed ofiicils who are incompetent and graft- ridden, ure factors contributing to a state of affairs that can be described definitely as dangerous.
Information recently received from a source believed reli ble but not confirmed, indicates that the Communist 8th Army is not s tisfactorily under control. It is reported that troops around PEKING are rebelling against AO TSE TUNG, whom they consider to have "sold then out" to CHIANG KAI-SHAK. Their feelings are believed to be anti-British and American owing to the support that these two Towers are giving to CHL-IG KAI-SHEK and in this way opposing the Communist faction. Consequent upon this report, the following infomation regarding the situation with the Comunist groups in and around SHANGILI has become available, but this is, also not at present confirmed.
The Comunists clein that they are already in
a position to take over 3E GHAI, at any time. They support their claim by stating that they have enough plain-clothes troops
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