The 2nd Company of the 46th Regiment of the communist 16th Division with less than 100 men were stationed at the town of Yiwu, 200 km northeast of Hami and over 700 nationalists under the nationalist Hami special envoy commissioner Yulbars Khan and the former nationalist county head Abdullah of Hami planned to take the town in late March 1950. The nationalist attack on the town was launched according to schedule on March 29, 1950.

The nationalists were confident in that the town could be taken within a little as three days and on the first day of the battle, the nationalists had succeeded in taking the northern and southern peaks next to the town, thus seriously threatened the enemy defenders within the town. Realizing the serious situation, the enemy defenders sent out four squads to retake both peaks, and thus solidified the defence of the town, threatening the nationalists instead. The nationalist attempts to take the two peaks back was met with disastrous failure after several dozen assaults were beaten back with heavy losses. Realising the tactic must be changed in order to avoid further casualties and the two hilltops must be taken, the nationalists adjusted their tactic of small-scale assaults to launch coordinated large-scale attacks on April 5, 1950. After the five-hour-long battle that lasted from 3:00 AM to 8:00 AM, the nationalist again suffered defeat with great loss due to favourable terrain the enemy defenders enjoyed. It was the last large scale attack the nationalists were able to muster and the defeat cost the nationalists so much that nothing on the similar scale could be repeated again in the battle.

Due to the lack of communication and the closest communist force was more than 200 km away, it was not until early April 1950 did the closest enemy force learned that their comrades in the town of Yiwu was besieged and sent out a token reinforcement, which was successfully stopped by the nationalists more than a dozen kilometres away from the town. Due to the lack of intelligence, the commander of the enemy reinforcement mistakenly believed that the town had fallen into the nationalist hands when the entire garrison was wiped out, and withdrew to Micheng on April 14, 1950. However, the enemy defending Yiwu was far from being wiped out, but instead, successfully beaten back seven nationalist assaults, badly mauling the attacking nationalist in the process by taking advantage of the favourable terrain.

In the beginning of May 1950, the communist 16th Division learned that the 2nd Company of the 46th Regiment still had the town firmly in its hands, and thus immediately sent out two battalions for reinforcement. By May 7, 1950, the enemy reinforcement had taken the Black Hilltop (Hei Shan Tou), and surrounded the nationalists who besieged the town. Sandwiched between the enemy defending the town and the enemy reinforcement surrounding them, the fates of the trapped nationalists were sealed. Realizing it was all over, the nationalists collapsed and attempted to flee despite the fact there was nowhere to escape. The enemy defenders easily linked up with their reinforcement and completely annihilated the nationalists on the same day, and not a single nationalist was able to escape. For its successful defence of the town, Peng Dehuai, the communist defence minister awarded the 2nd Company of the 46th Regiment of the communist 16th Division the title Steel and Iron 2nd Company, while the deputy battalion commander, Hu Qingshan was awarded the title Combat Hero.

The nationalist defeat was primarily due to Chiang Kai-shek's uncompromising doctrine of holding onto the land conquered at all costs, which was faithfully followed by the local nationalists, despite that it was simply impractical and impossible to hold on to the town. As it was becoming obviously clear that attacking nationalists were impossible to take the town, the nationalists refused to retreat, thus exhausting all of their available supplies. The lack of supplies, in turn, forced the nationalists to attempt to capture the town in order to capture more supplies, and thus the nationalists were locked in a dilemma they had created themselves, resulting in eventual total annihilation.