A Springboard to Victory: Shandong Province and Chinese Communist Military and Financial Strength 1937-1945 by Sherman Xiaogang Lai A thesis submitted to the Department of History in conformity with the requirements for the degree of Doctor of Philosophy Queen's University Kingston, Ontario, Canada September, 2008 Copyright © Sherman Xiaogang Lai, 2008 ISBN:ϵϳϴͲϬͲϰϵϰͲϰϰϯϮϳͲϵ ABSTRACT A Springboard to Victory: Shandong Province and Chinese Communist Military and Financial Strength, 1937-1945 Sherman Xiaogang Lai Thesis Supervisor: Professor Emily M Hill During the Sino-Japanese war of 1937 to 1945, the Chinese Communist Party (CCP) in Shandong Province in North China achieved an unnoticed but historically significant success in financial affairs. From that time onward, the CCP in Shandong not only controlled economic affairs within its territory, but also obtained access to territories under enemy occupation through manipulation of currency exchange rates and by controlling the trade in staple grains, cotton, salt and peanut oil. As a result, trade with occupied China and with the Japanese invaders became the principal source of revenue of the CCP in Shandong as early as the second half of 1943. By the time of Japan’s defeat in August 1945, about 80% of the CCP’s revenue in Shandong came from trade beyond the areas under its control. Moreover, the CCP in Shandong deliberately carried out a policy of controlled inflation to increase its financial power. The key to this achievement was the CCP’s success in establishing exclusive zones for its banknotes in August 1943. The exclusive use of CCP currency developed in the course of many years of armed conflict among Japanese, CCP and Nationalist (GMD) forces in the province. The CCP’s i banknotes were backed by Communist military power and military success. From their first days, the banknotes were intertwined with the military power of the CCP in Shandong and the supporting administrative institutions that Party authorities established in the province. The establishment of exclusive currency zones reflected the maturity of the CCP’s party-state. Because external trade was their principal source of revenue, CCP leaders in Shandong lacked the incentive to carry out social reform in Shandong. Moreover, justifications for the CCP’s program of agrarian revolution as carried out elsewhere were not found in Shandong. Rather than seeking social and economic transformation, the CCP built up power with a view to achieving a favourable position vis-à-vis the GMD before the end of the war against Japan. ii ACKNOWLEDGEMENTS This thesis is a result of numerous people’s intelligent power and efforts. It is a great pleasure to thank those people who have helped me complete this thesis. I owe a debt of gratitude to Professor Emily M. Hill, my supervisor. She has been an academic Master Sergeant, turning me, an infantryman of the Chinese People’s Liberation Army, into a Canadian PhD graduate with extraordinary patience and perseverance. I would also like to express my gratitude to the members of the Thesis Examination Committee for their examination and educating me. Professor David Parker emancipated me from the “Chinese ghetto” and placed the Chinese Revolution in a global perspective. Professor Andrew Hamish Ion’s tutoring about Japan’s prewar situation and strategy enabled me to explore interactions between the Japanese, the Chinese Nationalists and the Chinese Communists. Professor Wulin Suo helped me understand bonds and national banks, and Professor Ariel Salzmann helped me link revenue, coercion and state power together. Professor David Barrett’s questions and criticisms drew my attention to many problems that I had either ignored and or not handled well. I would like to thank the people who rendered valuable assistance helping me focus my research: Senior Colonel (retired) Liu Tong (PhD), Senior Colonel Qu Aiguo, Senior Colonel He Xincheng and Senior Colonel Jin Lixin of the Academy of Military Sciences of the People’s Liberation Army (PLA), Senior Colonel Zhang Zhanping of the Military Engineering College of the PLA, Professor Xu Yong of the History Department of Beijing University, Professor Chen Yung-fa of the Academia Sinica, Professor Fang iii Lizhu of Fudan University; Professor Jiang Weichang of the Shandong College of Education, and Professor Masahiro Yamamoto of the University of Wyoming. As for the support of librarians, I would like to thank Meng Qinglong of the World History Studies of the Chinese Academy of Social Sciences, Mr Xiao Xia and Ms Guo Hongfang of the Shandong CCP History Study of the CCP Shandong Provincial Committee, Mr Xue Wei and Mr Zhang Qiang of the Shandong Provincial Library, and Ms Xue of the Shandong Provincial Archives. As for other help, I would like to thank Ms Aoki Keiko who permitted me to study Japanese language in her class as an informal student. I would like to thank Professor Wang Xuedian, Professor Wang Xueyu and Mr Fen Keli of Shandong University and Miss Wei of the Office for the Overseas Chinese Affairs of the Jinan Municipal Government. I would like to thank those veterans who generously shared their war experiences with me: Mr Lu Huchun of the National Defence University of the People’s Library Army, Mr Zhang Zhaoyong and Mr Qu Qi of the CCP Shandong Provincial Committee. I would like to express my special gratitude to Ms Chen Li, my wife’s step-grandmother, who was a war veteran. I would like to express my gratitude to Ms Xu Wei who organized a bibliography translation team that included Ms Zheng Yi, Mr Liu Jun, Mr Wang Gang, Mrs Shi Hong, Ms Ye Qilu, Ms Li Xing and Mr Yao Jianhua. I would also like to thank Miss Kelly Rankin for copy-editing. I would like to express my appreciation of the generous Queen’s Award and the institution of Teaching Assistant assignments. Such valuable financial assistance has maintained my academic enthusiasm and enabled me to focus on academic pursuits. My iv gratitude above would be unlikely without the constant support of Professor Desmond Morton of McGill University. All of the above would have been out of the question without the constant support of my wife Hongyan Li and my in-laws. Throughout difficult years, my wife and her family have always given me their trust, encouragement and solid support. I like to express my love and appreciation to my wife and my in-laws: Lin Jian, Li Naxia, Zhang Dagang, Li Xiaoxia and Mao Xiaoming. v Table of Contents Chapter One: Introduction………………….……………………………………………...........1-25 Chapter Two: The Soviet Union and the Xi’an Incident, December 1936.…………..…….…26-43 1. Sino-Soviet rapprochement 2. Changes within the CCP 3. CCP’s Negotiations with the GMD and difficulties 4. The detention of Chiang Kaishek 5. Conclusion Chapter Three: Mao’s Rise to Dominance…………………………………………...………..44-73 1. Mao’s strategy of guerrilla war and Chiang Kaishek’s approval 2. Mao’s Conduct of Guerrilla War and Stalin’s Intervention 3. The Discovery of Shandong 4. Mao’s New Mandate from Moscow 5. Conclusion Chapter Four: The Beginning (Dec 1937-Apr 1939)…………….…….……..…………….74-104 1. An Overview of Shandong 2. The Rise of Shen Honglie 3. The CCP Uprisings and Appeals to Yan’an 4. The Shandong CCP’s Provincial Strategy 5. Mao and Moscow’s New Confrontational Policy 6. The opponents in the Triangle 7. The Birth and Challenge of the Shandong Bureau Chapter Five: The Escalation (May 1939-Dec1941)…………..………………….………..105-143 1. Before the 115th Division’s Arrival 2. The escalation of triangular conflicts 3. The Threat of a Nationalist-Japanese Accord 4. Mao’s Criticism and Pressure against Shandong Communists 5. Battle of Huangqiao, Miscalculation and the New Fourth Army Incident 6. Mao’s new idea and CCP’s military revenges in Shandong 7. Misjudging the enemy 8. Conclusion Chapter Six: The Perseverance (Jan 1942-Aug 1943)……………………….……….144-178 1. New Policy, Reorganizations and the Postwar Redeployment Plan vi 2. Two Commander’s Rivalry 3. CCP Infiltration 4. The Japanese Policy Change and CCP Responses 5. A rare opportunity 6. Conclusion Chapter Seven: Encroachments and Redeployments (Sep 1943-Oct 1945)…………….....179-206 1. The Shandong Bureau’s strategy of encroachments 2. Military strikes 3. Special operations in peripheral Areas 4. Covert operations in urban areas 5. Mao’s situation assessment and the Shandong Bureau’s summer offensive of 1945 6. Battle of Linyi and strategic redeployments 7. Conclusion Chapter Eight: The birth of Red Banking and fiscal affairs in wartime China…………….207-235 1. The CCP and Zhang Yutian 2. CCP Authority, Zhang Yutian and the birth and dissolution of the North Sea Bank 3. Mao’s financial anxieties and his intervention in North Sea Bank 4. Working towards an equitable taxation system 5. Structure of the CCP`s financial-economic system 6. Conclusion Chapter Nine: Institutions of economic control ……………………………………...…….236-261 1. North Sea Bank and its branches a. Jiaodong b. Central Shandong c. The JiLu border and Qinghe d. Binhai and southern Shandong 2. Economic control institutions 3. Conclusion Chapter Ten: Policy Changes ……………………………………………………….……262-297 1. The tianfu tax 2. Patriotic requisition of grain 3. Trade 4. Monetary Policy 5. Conclusion vii Chapter Eleven: Xue Muqiao, salt and exclusive currency zones……………………..….. 298-325 1. Xue Muqiao 2. Increased financial pressure and new policy experimentation 3. Xue and the Shandong bureau’s decision-making 4. A salt-defended exclusive currency zone 5. Conclusion Chapter Twelve: Assessing the Enemy’s Resources….………………………..…….….....326-358 1. Material-oriented mercantilism. 2. The cotton industry and self-sufficiency for the Shandong Bureau 3. The peanut industry 4. The BIC, comprehensive control and inter-zone trade. 5. Lessons from the other side of the coin 6. Increased demands and costs 7.