At the beginning of the civil war's second phase, Yan's National Salvation Front (NSF) controlled Shanxi, Gansu, Qinghai and Manchuria, while the fascist Blue Shirts controlled the rest of China (except for Xinjiang and Tibet). Despite controlling most of China's industry, the NSF suffered from infighting between Yan and Zhang Xueliang, the "Young Marshal" who would later defect to the Blue Shirts.

Zhang's defection to the Blue Shirts did the FSN in despite Japanese support for some of its factions, with Yan's forces being crushed at the Battle of Beijing in June 1934, and the Ma clique joining the Blue Shirts as well. Despite the FSN's defeat, the CCP remained active, prompting Dai to launch a White Terror that resulted in four million deaths.

The fascist NRA was reorganized with German and Italian support, becoming an effective fighting force that greatly outnumbered and outgunned the CPC. By late 1935, the communists had lost virtually all of their territory other than their stronghold of Shaanxi, and Mao Zedong had been captured and executed by the Blue Shirts.

In February 1936, NRA troops led by Bai Chongxi and Li Zongren launched a final offensive to eradicate the "red bandits" from China. Over one million regular army and paramilitary forces easily defeated the 200,000 communists left.

On 17 April 1936, the CPC headquarters in Yan'an fell to the Blue Shirts, effectively ending the civil war, although communist remnants remained active until the fall of Dai's regime in 1945, and would only be eradicated by his successor Wang Jingwei.