Retreat: If a unit unable to retreat (due to enemy presence or being in HQ area), do they take a step loss and also lose an action point, or just the step loss?
Take a step loss.
Grenades: do these need to be used by a unit, and must that unit expend an action of its own as well as rotating the grenades?
Just rotate the grenade and attack all enemy on the same area with any friendly unit.
Do grenades retreat automatically with defending units which lose a battle, and are they lost if a Japanese enters an area where they have been left?
Don't put the grenade on the map. It is a marker to remind how many grenades you own this turn. Any friendly unit on the map can use 2 grenades every turn.
Lt Col Xie: Finally - is Lieutenant Colonel Xie Jinyuan considered to be an offensive unit - can he/his unit attack? I am assuming so.
He can use command point to attack alone as other infantry units. To command other units to attack is his additional special ability.