In 1945, China emerged from the war nominally a great military power but economically weak and on the verge of all-out civil war. The economy was sapped by the military demands of a long costly war and internal strife, by spiraling inflation, and by corruption and mismanagement in the Nationalist government that included profiteering, speculation and hoarding.

Furthermore, as part of the Yalta Conference, which allowed for a Soviet sphere of influence in Manchuria, the Soviets dismantled and removed more than half of the industrial equipment left there by the Japanese before handing over Manchuria to China. Large swathes of the prime farming areas had been ravaged by the fighting and there was starvation in the wake of the war. Many towns and cities were destroyed, and millions were rendered homeless by floods.

The problems of rehabilitation and reconstruction from the ravages of a protracted war were staggering, and while the war left the Nationalists severely weakened, their policies left them unpopular. Meanwhile, the war strengthened the Communists both in popularity and as a viable fighting force in the north and northeast.

The Red Army, with strong grassroots support and its superior organization and morale, fostered the image of having conducted guerrilla warfare in defense of the people. Communist troops adapted to changing wartime conditions and became a seasoned fighting force. With skillful organization and propaganda, CCP membership grew from 100,000 in 1937 to 1.2 million by 1945.

Mao also began to execute his plan to establish a new China by rapidly moving his forces from Yan'an and elsewhere to Manchuria. The Soviet occupation of Manchuria was long enough to allow the Communist forces to move in en masse and arm themselves with the military hardware surrendered by the Japanese army, quickly establish control in the countryside, and move into position to encircle the Nationalist government army in major cities of northeast China. 

The CCP acquired a large number of weapons abandoned by the Japanese, including some tanks, but it was not until large numbers of well-trained KMT troops surrendered and joined the communist forces that the CCP were finally able to master the hardware. Despite the disadvantage in military hardware, the CCP's ultimate trump card was its land reform policy. The CCP continued to make the irresistible promise in the countryside to the massive number of landless and starving Chinese peasants that by fighting for the CCP they would be able to take farmland from their landlords. This strategy enabled the CCP to access an almost unlimited supply of manpower to use in combat as well as provide logistic support, despite suffering heavy casualties throughout many civil war campaigns. For example, during the Huaihai Campaign alone the CCP were able to mobilize 5,430,000 peasants to fight against the KMT forces.

Using the pretext of "receiving the Japanese surrender," KMT officials occupied most of the banks, factories and commercial properties, which had previously been seized by the Imperial Japanese Army. They also recruited troops and hoarded supplies, preparing for a resumption of war with the Communists. These hasty and harsh preparations caused great hardship for the residents of cities such as Shanghai, where the unemployment rate rose dramatically to 37.5%.

The US strongly supported the KMT. 50,000 Marines were sent to guard strategic sites, and 100,000 US troops were sent to Shandong. The US equipped and trained over 500,000 KMT troops, and transported KMT forces to occupy newly-liberated zones, and to contain Communist-controlled areas. American aid included substantial amounts of both new and surplus military supplies, and loans worth $4.43 billion from the US - most of which was military aid. 

On 20 July 1946, Chiang Kai-shek launched a large-scale assault on Communist territory with 113 brigades (1.6 million troops). This marked the final phase of the Chinese Civil War. Knowing their disadvantages in manpower and equipment, the CCP executed a "passive defense" strategy. They avoided the strong points of the KMT army, and were prepared to abandon territory in order to preserve their forces. In most cases, the surrounding countryside and small towns had come under Communist influence long before the cities. They also attempted to wear down the KMT forces as much as possible. Three decisive Liaoshen, Huaihai and Pingjin campaigns effectively broke the back of the KMT army. 

Sep-Nov 1948 in the decisive Liaoshen Campaign the CCP captured the northern cities of Shenyang and Changchun and seized control of all of Manchuria mainly by encirclement. The KMT lost its chief resources; the PLA went from numerical inferiority to superiority; the KMT was seriously demoralized. 

Nov 1948-Jan 1949 in the Huaihai Campaign, PLA took the area north of the Yangzi. Chiang committed his best-trained, best-equipped units to this campaign, but it was doomed by pervasive CCP spying in the ROC ranks. Spies not only leaked info to the PLA, and gave strategic disinformation to Chiang, but instigated massive defections to the PLA, and even caused a vendetta between ROC generals Huang Baitao and Qiu Qing-quan, the latter of whom withheld his units from combat in the decisive battle of Xubeng (Xuzhou) – both generals committed suicide in the defeat. The capture of large KMT formations provided the PLA with US-supplied tanks, heavy artillery, and other combined-arms. Truman lost faith in Chiang and cut off US aid. Furthermore Chiang was stripped of leadership of the KMT.

The Pingjin Campaign resulting in the Communist conquest of northern China lasted 64 days from Nov 1948, to Jan 1949. The PLA suffered heavy casualties securing Zhangjiakou, Tianjin along with its port and garrison at Dagu, and Beiping. The CCP brought 890,000 troops from the Northeast to oppose some 600,000 KMT troops. There were 40,000 CCP casualties at Zhangjiakou alone. They in turn killed, wounded or captured some 520,000 KMT during the campaign. After Lin Biao took Zhangjiakou, Xinbao’an, Tianjin, and Beiping surrendered.

On 21 April, Communist forces crossed the Yangtze River. On 23 April they captured the KMT's capital, Nanjing. The KMT government retreated to Canton (Guangzhou) until October 15, Chongqing until November 25, and then Chengdu before retreating to Taiwan on December 10. 

In 1949 Red Army victories led to the evacuation from the mainland to Taiwan by Chiang and the KMT, and the creation on 1 October, 1949, of the People's Republic of China (PRC) by the CCP on the mainland, with the Republic of China's (ROC) jurisdiction being restricted to Taiwan, Penghu, Quemoy, Matsu and several outlying islands. While the PRC continued to call for the unification of all China, Chiang proclaimed Taipei the temporary capital of the ROC and asserted his government as the sole legitimate authority in China. Truman’s Democratic administration was accused by Republicans of having “lost” China, and the US, until the 1970s, continued to recognize the ROC in Taiwan as the true government of China.

Chiang wrote in his diary in June 1948 that the KMT had failed, not because of external enemies but because of rot from within. Strong initial support from the US diminished, and then stopped completely partly because of KMT corruption, and partly because of the uncertain US foreign policy towards Communism between 1945 and 1950. Communist land reform policy, which promised poor peasants farmland from their landlords, ensured peasant support for the PLA.