Yanan, in Shaanxi Province, northwestern China, was one of the poorest regions in China. Bordering on the Yellow River, usually called the cradle of Chinese civilization because the earliest Chinese state was founded on the Yellow River, the region where Yanan was located suffered from soil erosion, constant floods and droughts over the centuries. The poverty of the peasants there plus the high taxes they were subject to under Nationalist rule made them easily susceptible to Communist propaganda of rent/tax reduction and land redistribution. By 1936, Liu Chi-tan had established a Soviet base there, which was one reason why the Long March stopped there, other reasons being that it was closer to Manchuria (occupied by the Japanese then), and to the Soviet Union in the north.

After the Red Army set up base in Yanan, Mao's Communist regime established a series of policies and practices of reducing tax/rent, and land redistribution. Because of the extreme poverty of the region, even the rich peasants or landlords did not hold massive amounts of land as landlords tended to do in southern China. Still, the land redistribution program was carried out, and many of the real poor peasants benefited. The tax burden was now shifted primarily to the landlords. In addition to tax, the Shaansi Soviet base also had their own banks, industries, and cooperative stores to generate a certain amount of income. Basically, the Communists here survived on a frugal lifestyle. It was eventually their frugality, which contrasted so sharply with the corruption of the Nationalists, that impressed the Americans who, for a while, even toyed with the idea of allying with the Communists against Japan.

Besides frugality, one important reason to explain how the Communists could survive on such meager income was the large numbers of weapons they acquired from the defeated Nationalists in the battlefield. In the 1930s-1940s, a Communist ballad went "We don't have food or clothing, but the enemy (the Nationalists, and later the Japanese) presents them to us; we don't have guns and cannons, but the enemy makes them for us."

There was also very high morale. The Communists spent hours each day on political education. This kind of political mobilization even went on during the Long March, which explained how thousands of men and women managed to go through it. In Yanan, while not fighting, the red soldier worked two hours on studying Chinese characters (the Chinese words resemble pictures and are called characters) per day. He/she also had recreational activities such as games and sports, as well as political study hours to fill the day and constantly remind him of the purpose of his life and work to keep the morale high. The high morale also had to do with the close bond between officers and the soldiers in the Red Army, which again contrasted with Chiang Kai-shek's army who, in the 1940s, had to be increasingly drafted and chained. High morale was especially encouraged in the red army because of the difficult situation the red army was in, the uncertainty of the future for them, the terrible economic circumstances they were in, and the very crude living conditions they had.

Despite a simplistic lifestyle, the Chinese Soviets in Shensi Province enjoyed an organized and cultured life. There was a Red Army University where students learned the Communist teachings and world affairs, and there was a Red Theatre staged by often professional actors/actresses who came from the Nationalist occupied areas, one of whom was Jiang Qing, a second class movie actress from Shanghai, who would later on become the third Madame Mao Tse-tung in Yenan.

Although out of the 90,000 Red Army that marched from Jiangxi to Yanan, only 3,000 made it (Spence's figures are 100,000 and 10,000 respectively, due to different counting methods), the Red Army expanded its ranks over the years through land redistribution, tax reduction, and cooperation with the peasants.  With the war against Japan, the Communists exercised guerrilla warfare, liberating China region by region, and redistributing land where they went.  By 1945, they occupied almost one third of China.  Civil war set the Communists back initially, but they quickly recovered and by 1947, they were on the offensive.