Steps taken by the Chinese Government toward governmental reorganization in mid-April, 1947, aroused hopes of improvement in the political situation. However, the reorganization resulted in little change. Reactionary influences continue to mold important policies even though the Generalissimo remains the principal determinative force in the government. Since the April reorganization, the most significant change has been the appointment of General Chen Cheng to head the civil and militant administration in Manchuria. Projected steps include elections in the Fall for the formation of a constitutional government, but, under present conditions, they are not expected to result in a government more representative than the present regime. ECONOMIC Under the impact of civil strife and inflation, the Chinese economy is disintegrating. The most probable outcome of present trends would be, not sudden collapse, but a continued and creeping paralysis and consequent decline in the authority and power of the National Government. The past ten years of war have caused serious deterioration of transportation and communication facilities, mines, utilities and industries. Notwithstanding some commendable efforts and large amounts of economic aid; their overall capabilities are scarcely half those of the prewar period. With disruption of transportation facilities and the loss of much of North China and Manchuria, important resources of those rich areas are no longer available for the rehabilitation and support of China’s economy. Inflation in China has been diffused slowly through an enormous population without causing the immediate dislocation which would have occurred in a highly industrialized economy. The rural people, 80 per cent of the total Chinese population of 450 millions, barter foodstuffs for local handicraft products without suffering a drastic cut in living standards. Thus, local economies exist in many parts of China, largely insulated from the disruption of urban industry. Some local economies are under the control of Communists, and some are loosely under the control of provincial authorities. The principal cause of the hyper-inflation is the long-continued deficit in the national budget. Present revenue collections, plus the profits of nationalized enterprises, cover only one-third of governmental expenditures, which are approximately 70 per cent military, and an increasing proportion of the budget is financed by the issuance of new currency. In the first six months of 1947 note-issue was tripled but rice prices increased seven-fold. Thus prices and governmental expenditures spiral upwards, with price increases occurring faster than new currency can be printed. With further price increases, budget revisions will undoubtedly be necessary. The most urgent economic need of Nationalist China is a reduction of the military budget.