In 1947, the 228 Incident occurred in Taiwan and in April of that year the Executive Yuan abolished the Governing Council, replacing it with the Taiwan Provincial Government.
Toward the end of the civil war in China, after national government forces were defeated in the Liaoshen, Huaihai and Beijing-Tianjin campaigns, which resulted in the loss of Northern China, combat capability and morale bordered on collapse. In early 1949, facing both internal and external pressure, and after considering the situation for several days, Chiang Kai-shek resigned and Vice President Lee Tsung-jen became acting president in peace talks with the Chinese Communists. This was the third time Chiang had stepped down in his military and political career and he immediately returned to his hometown of Fenghua in Zhejiang. However, Chiang had few illusions about the prospects for peace talks with the Communists and so, on the eve of his resignation, he made comprehensive deployments and plans for the future to “start anew and reestablish the foundation of the revolution.” He thus identified Taiwan as a new base for the anti-communist struggle.
After Chiang retired to his hometown to recuperate, Chen Cheng, chairman of the Taiwan Provincial Government, remained in close contact with him, frequently sending telegrams seeking instructions on military and civilian policy and reporting to him on the situation in Taiwan. Chen had been in charge of Taiwan for two years and during that time he had convened two provincial administrative meetings, imposed controls on entry to the island, increased food production, reorganized state-owned enterprises, implemented a 37.5% arable rent reduction act, introduced monetary reform, promoted planned education and was preparing to implement local autonomous government across Taiwan.