The military position of the National Government of China continues to deterio­rate rapidly. The large North China industrial centre of Tientsin fell on January 15 and Peiping is expected to be surrendered in a matter of days. This will permit Communist troops from the Manchuria and the North China front to move South to reinforce those attacking in the Nanking‑Shanghai area. Already the Nationalists have lost a large number of troops surrounded, captured, or killed in the pockets South of Hsuchow. The last major Government bastion at Pengpu on the Hwai river line one hundred miles North of Nanking was given up two days ago. The remaining Nationalist troops are being drawn back for a defence of the Yangtze river line supported by the Chinese Navy. It is difficult to say how long the Yangtze river line could be held. Chinese, whose morale is one of the key factors, are not optimistic.

2. In the face of these disheartening military set‑backs, the National Government is both preparing to withdraw from Nanking to the South and concurrently putting out peace feelers. In his New Year's broadcast the Generalissimo made his first public peace overture. Since that date, these have been echoed by numerous public bodies in Nationalist territory. On January 8, the Chinese Government presented an aide‑memoire in identical terms to the United States, French, Soviet and United Kingdom Ambassadors in Nanking, indicating that the Chinese Government would welcome any suggestions leading to an early restoration of peace. After consulta­tion the three Western Powers have returned replies informing the Chinese in effect that they see nothing that they could constructively do at this time by intervening. The Soviet Government has also replied negatively. The question of peace negotia­tions is, therefore, left entirely to the Chinese. The Communists have broadcast terms for a truce and the resumption of political negotiations which provide for the removal of Chiang Kai‑shek, and many of his immediate associates, the rescinding of the new constitution and acknowledgment of a dominant role for the Commu­nists in any future coalition Government. While these terms are disappointing to the Nationalists, there is evidence that continued efforts are being made to enter into peace negotiations.

3. In preparation for the contingency that satisfactory truce terms could not be arrived at, the National Government is preparing to withdraw to the South. Already parts of the Chinese Airforce and Navy have moved to Formosa. A close friend of the Generalissimo has been named Governor of that Island. Rumours are reported that all gold and foreign exchange reserves in Nationalist banks have been removed to Formosa. Government administrative services are being dispersed.

4. On January 14, the Chinese Ambassador called to request the Canadian Gov­ernment to instruct the Canadian Ambassador to accompany the National Govern­ment to Canton, if it is compelled to evacuate Nanking. The Government places great store by the Ambassadors of friendly Governments accompanying it, should it be compelled to leave Nanking. In November, instructions were sent to Ambassa­dor Davis informing him that if the National Government should evacuate Nanking accompanied by the British and American Ambassadors he (Mr. Davis) and the Military Attache should accompany the Government, leaving Mr. Ronning and Mr. Maybee (External Affairs Secretaries) in Nanking. We have been endeavouring to learn what attitude the United Kingdom and United States Governments propose to adopt. Neither Government is sanguine about the possibility of the National Gov­ernment being able to hold together for many weeks if it is compelled to evacuate Nanking. They are, therefore, inclined to await developments before sending last minute instructions to their Ambassadors. In the meantime, in order to ensure that there will be Canadian officials to look after the interests of approximately 500 Canadians, missionaries and business people, who plan to remain on under the Communists, we are issuing concurrent Consular Commissions to our diplomatic Secretaries in Nanking. Two will remain there and one in Shanghai for the change over.¹

H.O. M[ORAN]