Hi there! I can give you a quick, partial response before I hit the hay.

Given the immense scale of the destruction, with hundreds of thousands of dead, what was the decision-making process for opening the dykes? Did they understand how many people would be killed?

The strategy of destroying the Yellow River dikes was first proposed in 1936 by Alexander von Falkenhausen, the chief German military adviser to Generalissimo Chiang Kai-shek. In 1938, however, it seems that Chinese leaders (Chen Guofu, Cheng Qian, and Chen Chengju) influenced Chiang's decision. All of them presumably understood the consequences. In fact, the Chinese government attempted to make the best of the situation by pinning the blame on Japanese bombers. Chiang himself expressed little if any remorse over the catastrophe.^1

That said, one must note that the breaching of the dikes was an act of desperation. To quote Diana Lary: "In the weeks before it was done, as the Japanese armies continued their relentless advance across China, sober strategic thinking in the Chinese command gave way to a mood close to panic, in which any conceivable action could be taken to try and stop the Japanese advance."^2

The actual number of civilian losses is unknown, but official statistics (compiled after the war) suggest that people farther away from the breach were impacted more severely; those closest to the breach apparently received prior warning from the authorities. Of course, as Lary points out, "many peasants would have been unwilling to leave their land and their crops," especially around harvest season.^3

The wiki article makes it sound as if the impact on the Japanese was quite small, was this understood and thought acceptable?

The flooding did slow down the Japanese advance, though modern scholars disagree on its overall efficacy.^4 Unsurprisingly, the official military histories of the Guomindang offer favorable assessments. For instance: "Based on the scorched-earth policy, we decided to breach the Yellow River embankment, which proved very helpful to the whole situation. The above decision and estimate of the situation made by the Generalissimo fully reflected his wisdom and outstanding ability."^5

Was this incident used for propaganda purposes by the Communists?

Yes, but not until after 1949. According to Lary, the Communists "used the scale of casualties in the flood as a symbol of the inhumanity of the Guomindang, which was presented as willing to sacrifice huge numbers of peasants." Lary also observes that, in Communist sources, casualty estimates ("along with the level of rhetoric") rose considerably over the decades, from 470,000 dead (in the 1950s) to 900,000 dead (in the 1990s).^6

I'll leave it at this for now, since I'm pretty tired. Hopefully this answers some of your questions in the meantime! :)

 

Footnotes:

^1 Diana Lary, "Drowned Earth: The Strategic Breaching of the Yellow River Dyke, 1938," War in History 8, no. 2 (2001): 197-9; Jay Taylor, The Generalissimo: Chiang Kai-shek and Struggle for Modern China (Cambridge: Belknap Press of Harvard University Press, 2009), 154f.

^2 Lary, "Drowned Earth," 191f.

^3 Ibid., 202-4.

^4 See e.g. ibid., "Drowned Earth," 201f.; Hans J. van de Ven, War and Nationalism in China, 1925-1945 (London: RoutledgeCurzon, 2004), 226; Tobe Ryōichi, "The Japanese Eleventh Army in Central China, 1938-1941," in The Battle for China: Essays on the Military History of the Sino-Japanese War of 1937-1945, ed. Mark Peattie et al. (Stanford: Stanford University Press, 2011), 209f.

^5 History of the Sino-Japanese War, trans. Office of Military History, Military Assistance Advisory Group, 101. See also Hsu Long-hsuen and Chang Ming-kai, History of the Sino-Japanese War (1937-1945) (Taipei: Chung Wu, 1971), 235f.

^6 Lary, "Drowned Earth," 205-7.