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Japanese rivalry and Communist China

Japan invades

Cooperation with China was overtaken by the Japanese invasion. Japan had strong economic interests in China and had been Britain's major competitor since before the First World War in terms of finance, trade and manufacturing. The Japanese, unlike the British, wished to secure control of raw materials and manpower. By occupying the northern province of Manchuria in 1931, they moved beyond informal empire. Their army swept down the coast, seizing territory but respecting the foreign enclaves. The enclaves provided shelter for Chinese resistance fighters, and tension increased until a settlement in 1940 allowed the Japanese army access. The fate of the treaty ports was now in the Japanese hands. Hong Kong and the settlements of Shanghai and Tientsin were conquered in December 1941, ending Britain's informal empire in China.

Re-occupation of Hong Kong and civil war

In 1945, when Britain re-occupied Hong Kong, British companies attempted to take up their pre-war interests. The Kuomintang, however, was determined to follow a nationalistic economic policy. The Anglo-Chinese Treaty of January 1943 abolished the old treaty system and embargoed independent foreign shipping on the Yangtze. In 1946 it restricted imports to encourage indigenous production. British business interests went against these measures and circumstances became uncontrollable after the outbreak of civil war between the Kuomintang and the Chinese Communist Party in 1946.

Recognition of Communist China

The 1949 Communist People's Republic of China was uncompromising in rejecting treaties and loans, which forced British firms to withdraw. British recognition of the Communist government in China was announced on 6 January 1950.