During the Japanese invasion and occupation of Manchuria, Chiang Kai-shek, who saw the Communists as a greater threat, refused to ally with the Communists to fight against the Japanese. On December 12, 1936, Kuomintang Generals Zhang Xueliang and Yang Hucheng kidnapped Chiang and forced him to a truce with the Communists. The incident became known as the Xi'an Incident. Both parties agreed to suspend fighting and form a Second United Front to focus their energies and fighting against the Japanese.
The alliance that was created with the Communists was in name only and the Communists hardly ever engaged the Japanese in major battles but proved efficient in guerilla warfare. The level of actual cooperation and coordination between the CPC and KMT during the Second World War was minimal. In the midst of the Second United Front, the Communists and the Kuomintang were still vying for territorial advantage in "Free China" (i.e. those areas not occupied by the Japanese or ruled by puppet governments).
The situation came to a head in late 1940 and early 1941 when there were major clashes between the Communist and KMT forces. In December 1940, Chiang Kai-shek demanded that the CPC’s New Fourth Army evacuate Anhui and Jiangsu Provinces. Under intense pressure, the New Fourth Army commanders complied, but they were ambushed by Nationalist troops and soundly defeated in January 1941. This clash, which would be known as the New Fourth Army Incident, weakened the CPC position in Central China and effectively ended any substantive cooperation between the Nationalists and the Communists and both sides concentrated on jockeying for position in the inevitable Civil War.
Within the Japanese occupied provinces the KMT and CCP forces carried on warfare with each other with the Communists eventually destroying or absorbing the KMT forces or driving them into the puppet forces of the Japanese. By the end of the Second Sino-Japanese War the Communists were in control of nearly all of the areas of North China not controlled by Japan or its puppet forces.
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- Resistance and Revolution in China