Wins in three of five mayoral seats gave the Nationalist
Party, or KMT, a clear shot at retaining the presidency, which
will calm Beijing as it has worked closely with the party on
landmark trade deals after decades of political hostilities.

China has claimed sovereignty over self-ruled Taiwan for
six decades but since 2008 has discussed economic issues with
President Ma Ying-jeou’s government. Beijing hopes those talks
will lead eventually to political unification.

“Of course China doesn’t want to see any change in the
status quo, particularly in the three cities that the KMT has
held for a long time,” said Shane Lee, political scientist at
Chang Jung University in Taiwan.

The KMT won second four-year terms in Taipei and Sinbei,
the island’s two largest cities, and in the central city of
Taichung. The anti-China opposition Democratic Progressive
Party (DPP) held the southern cities of Kaohsiung and Tainan.

Taiwan financial markets will at least remain stable and
may gain on the KMT’s victories as the results herald more
tie-ups between export-reliant Taiwan and economic powerhouse
China.

Investors had feared that a DPP win could extend to the
presidency and threaten trade deals. China and Taiwan are due
to talk next year about new import tariff cuts following an
economic cooperation framework (ECFA) signed in mid-2010.

Saturday’s wins also end a slump for the KMT. The party
did poorly in local polls elsewhere in Taiwan last year and in
by-elections earlier this year as Ma’s opinion poll ratings
struggled after a string of 2009 domestic flaps. [ID:nRISKTW]

However, Taiwan politics change fast, meaning the 2012
presidential race will be decided by unforeseen new issues
dominating the public agenda that year.

KMT leaders were low-key in their acceptance speeches.

“Hau Lung-bin will go to the people and listen to their
voices,” the reelected Taipei mayor said of himself in a
televised speech. “There are a lot of areas where we need to
review and improve.”

Voters cast ballots after the son of a former Taiwan vice
president was shot and wounded during a ruling party campaign
rally near Taipei late on Friday and a bystander was killed.

Media reports said a man arrested for the shooting was a
member of a criminal gang and did not appear to have a
political motive.

Opposition ex-president Chen Shui-bian won by a thin
margin in 2004 after a bullet grazed him and his running mate.
The KMT said that incident was staged to win sympathy votes.
(Editing by Andrew Marshall)

(Created by Andrew Marshall)

Beijing’s growing impatience, though seldom expressed openly, could set back trade, transit and economic cooperation deals for which Taiwan has looked to Beijing since 2008 for help in advancing its $416 billion economy.

“There’s definitely a sense of urgency to get this thing going,” said Raymond Wu, managing director of Taipei-based political risk consultancy e-telligence.

In August, China’s second most senior negotiator on Taiwan affairs, Li Yafei, hinted on a visit to the island that Beijing had softened a tough condition for political talks.

Beijing normally insists that Taiwan renounce any ambitions of de jure independence from China.

On October 13, China offered to discuss super-sensitive military issues to ease six decades of war preparations across the 160 km-wide (100 mile-wide) Taiwan Strait but was met with a cold reception from Taiwan.

Beijing’s latest five-year plan calls for the pursuit of a “peaceful development framework,” new language that implies putting the future of relations into a guiding document.

China is also stepping up informal contacts with Taiwan officials and even the island’s anti-China opposition party to mount pressure ahead of November 27 local elections [ID:nTOE6AH05I] seen as a barometer for a 2012 presidential race, experts say.

TAIWAN TAKING ITS TIME

Ma is in no hurry. His repeated vows not to talk politics with Beijing until at least 2012, and possibly later, have helped him consolidate power after a rocky year of domestic issues in 2009.

China has claimed self-ruled Taiwan since the Chinese civil war of the 1940s. Since Ma took office in 2008, the two sides have signed historic but relatively easy trade and transit deals, avoiding politics or defense.

The next round of formal China-Taiwan talks, due next month, will cover only a simple investment guarantee deal and nothing political, island officials say.

Lack of progress on political issues sets back Beijing’s goal of reunification with Taiwan, which is a close U.S. ally, and threatens to render useless a series of economic sweeteners that China has offered as an incentive for an eventual merger.

“(China) sees Ma not working toward peaceful reunification, just peaceful coexistence,” said Alexander Huang, a strategic studies professor at Tamkang University in Taiwan. “But China has said political relations should not lag economic relations.”

Taiwan officials say they need more economic tie-ups before they can trust China with political talks.

If Beijing makes no headway, analysts expect it will still help Ma win re-election in 2012, probably with more pro-Taiwan trade deals, to keep the more China-hostile opposition Democratic Progressive Party (DPP) out of power.

But if Ma shuns political dialogue into a second term, China is expected to freeze or even eliminate benefits from its huge economy as a reminder of what it ultimately wants.

China showed a willingness to do that last year by diverting visitors away from the southern Taiwan city Kaohsiung after its mayor invited Tibetan spiritual leader the Dalai Lama, who Beijing reviles as a pro-Tibet separatist.

“The Chinese want to keep reminding Ma that there are next steps, especially in consolidating and solidifying ‘one China’ position,” said Ralph Cossa, president of the U.S. think tank Pacific Forum CSIS.

(Editing by Robert Birsel)

TAIPEI (Reuters Life!) – Taipei, once a litter-strewn, concrete shantytown, has become a crowded but convenient mix of museums, monuments and high-end eateries from the world’s second tallest building to the scenic slopes of an urban mountain range.

Reuters correspondents with local knowledge help visitors get the most from a short stay:

FRIDAY

6 p.m. – Start at the top. Around dusk, the world’s second tallest building, Taipei 101, offers sunset views that take in an urban area of nearly 6 million people, three rivers and mountains on four sides. Admission to the 89th floor observation deck is T$350 ($10.93) per adult.

8 p.m. – Restaurants and coffee shops dominate the veranda-like fourth floor of Taipei 101. Prominent ones include Hwa Young Boutique Cuisine and the Wasabi Buffet & Dining Bar. Sit outside and watch Taipei’s modern elite walk by.

10 p.m. – Tip a few back at a full-service bar, sometimes with featured micro-brews, at the Cosmopolitan Steak & Grill outside the skyscraper on Songren Road.

SATURDAY

7:30 a.m. – Eat a Chinese or Western breakfast at The Grand Hotel on a hillside with views over much of Taipei offers a buffet on one side of its cavernous red-carpeted lobby, part of a 12-storey Chinese-style monolith built in 1952 by Taiwan’s then dominant Nationalist Party (KMT).

9:30 a.m. – Spend at least half a day at the National Palace Museum. It houses 654,500 one-of-a-kind imperial scrolls, paintings and pottery pieces sneaked over from China toward the end of civil war in 1949. Because 3,000 exhibits are on display at any one time, you can spend hours browsing. Admission: T$160.

1 p.m. – Lunch at Silks Palace, a four-storey restaurant with opaque glass walls and an intricate Chinese-style interior design next door to the museum. Museum-themed foods including the irresistible “jadeite cabbage with insects” dominate the menu.

3 p.m. – Free fashion show. A web of pedestrian-only streets at Ximen Ding attracts groups of teens and 20-somethings in the latest clashing East Asian trends. A music store, a cinema and colorful haberdasheries line the streets.

5 p.m. – A 20-minute (T$300 or so) taxi ride from Ximen leads to Dihua Street, the soul of old Taipei. This pedestrian-friendly street anchors a district packed with shops and shoppers trading in loose-leaf tea, traditional medicines and soup ingredients. Historic two-storey Taipei houses line some of the streets.

7 p.m. – Dinner at the Shin Yeh Taiwanese Restaurant behind the Imperial Hotel, which is on Linsen North Road. Try its seafood, tofu and green veggie dishes made from local recipes chased by a complementary pastry-tea set.

10 p.m. – Taiwan’s “combat zone,” named for its former popularity with American GIs seeking R&R in the Vietnam War era, is around the corner from one of Shin Yeh. Try the cozy My Place bar or the more raucous Manila across the street.

SUNDAY

10 a.m. – Hangover-relief caffeine at Dante, 85C, Ikari, IS Coffee or Mr. Brown, all local chains with strong brews.

11 a.m. – Stroll through the 25-hectare Chiang Kai-shek Memorial Hall compound. The former strongman’s name has been restored since 2008, after the political opposition removed it from the site when in power. A garden and teahouse on the grounds bring relief from the treeless, sun-baked plazas.

2 p.m. – Lunch at Din Tai Fung, a restaurant famous around Asia for mini dumplings stuffed with meat and soup broth. It’s on Yongkang Street, which is Taipei’s kitchen.

4 p.m. – Eslite culture megaplex. It includes a 660 square-meter bookstore, half a floor of local and foreign music CDs, several cafes (one known as a pick-up spot) and more than 80 other stores. The bookstore is open 24 hours.

8 p.m. – End your trip where it started, the top. This time The Top is a tropical resort-style restaurant-cafe on the slopes of Yangmingshan, a mountain range north of Taipei. The indoor-outdoor venue near Chinese Cultural University is best known for sweeping views of Taipei about 300 meters below.

(Reporting by Ralph Jennings, Editing by Belinda Goldsmith)

As Taiwan’s public has put their hopes on Taiwan taekwondo competitor Yang Shu-chun, the government is asking event authorities in China to dig deeper into her disqualification on Wednesday over unauthorised footgear.

“Taiwan’s public cannot accept this,” presidential office spokesman Lo Chih-chiang said. “The president is asking the cabinet and the sports commission to stick up for her rights. We hope they can re-evaluate the case and offer better reasoning.”

Ma’s demand follows angry protests from Taiwan’s team officials and a sit-down protest by the tearful Yang, who refused the leave the arena.

Yang had almost defeated Vietnamese Thi Hau Vu in a women’s 49-kg category when match officials halted the bout a few seconds from the end after deciding her footguards carried unauthorised extra electronic sensors behind the heel.

Competitors must wear protective gear and gain points by attacking the body and face or knocking down one another, with the sensors helping ascertain the successful scoring of points.

But the World Taekwondo Federation is considering whether to impose sanctions on the Olympic semi-finalist and her coach.

“Is this fair? No. Is this acceptable? No,” said Yang Jin Suk, federation secretary general. “It is purely manipulating of behaviour, intentional of cheating. That’s why the individual was disqualified.”

Taiwan team officials said the equipment had been previously green-lighted for the bout. Yang Shu-chun, red-eyed and sleepless, said little on Thursday, but some of her outraged fans were more vocal.

“Yang (Shu-chun) was our medal hope. It’s so unfair!” said Wu Mei-yueh, 32, a Taiwanese accountant in Guangzhou for the Games. (Editing by John O’Brien; To comment on this story email sportsfeedback@thomsonreuters.com)

Economists say the stricter rules will ultimately raise
the competitiveness of the $416-billion economy against
greener Asian rivals and boost its corporate image among
eco-conscious Western consumers.

“People realise the short-term interests from economic
development, but worry long term about environmental
protection, so we need to attain a balance,” Taiwan
Environmental Protection Administration chief Stephen Shen
told Reuters.

The island industrialised in the 1980s with little public
protest to become one of Asia’s four economic dragons. Now, it
is working on more transparent environmental reviews for new
projects and tougher energy laws, including a tax regime and
carbon reduction targets for 2020, 2025 and possibly 2050.

(For a related factbox, see [ID:nTOE68K04A])

Officials also want to phase out traditional polluting
industries and join international carbon trading schemes.

Government action follows a spate of protests, including
an 8,000-strong rally over the weekend denouncing a planned
300,000 barrels-per-day oil refinery complex on Taiwan’s west
coast that could foul the air and hurt local dolphins.

Earlier outcries had already extended an environmental
impact review of the $36-billion, CPC Corp-led Kuokuang
Petrochemical Technology Co refinery project [ID:nTOE66D03J].

“The government hasn’t told citizens why we absolutely
need this plant,” said Kan Chen-yi, secretary of a
conservation group behind the protest. “It could spread
pollution all over Taiwan, hurt dolphins and pollute the
water.”

Three fires in six months earlier in the year at a giant
refinery run by Formosa Petrochemicals
[ID:nTOE66P054] led to calls for its closure. Some protests
sparked clashes with police.

In another case, farmers and environmentalists filed a
lawsuit to block expansion of a science park in central
Taiwan. The park was asked to reevaluate the environmental
impacts and resubmit plans, the Government Information Office
said.

The new measures will oblige the densely populated
island’s high-tech, petrochemical and textile companies to
invest in upgrading factories.

CORPORATE IMAGE, ENERGY BILLS

But officials also hope for a latent dividend — boosted
corporate images and reduced energy bills.

“In the short term, in terms of costs, companies may look
at the laws unfavourably, but these measures will be looked at
very favourably by consumers in the United States,” said Liu
Li-gang, head of China economic research with ANZ in Hong Kong.

Stronger environmental laws are also expected to induce
new investment as local startups or foreign firms want to see
specifics on rules before making a commitment. Taiwan has long
been criticised for murky or cumbersome business procedures.

The president of the American Chamber of Commerce says the
900-member body has questioned the transparency of Taiwan’s
environmental impact assessment methods.

“Firms don’t want to put money into a plant and then find
themselves responding to unclear or inconsistently applied
rules,” said Mark Williams, senior China economist with
Capital Economics in London.

Taiwan is wary of its competition.

South Korea, heavily reliant on exports, has proposed
legislation to launch a carbon emissions trading scheme
[ID:nTOE6AG05W] this year, while Japan aims to pass a climate
bill setting rigorous emissions targets.

Many Taiwan companies are not waiting to be told.

They have cut emissions or recycled wastewater on their
own, industry associations say, and expect to do more over the
next five years.

The world’s biggest contract chipmaker TSMC says
it voluntarily cut perfluorocarbon emissions, a major
greenhouse gas often used in medical applications, in 2001 and
slashed its carbon emissions output in 2005.

“We have seen that consumers increasingly want to buy
green products,” TSMC’s top publicist, Michael Kramer, said in
a statement. “And naturally, conserving electricity and water
as well as recycling materials reduces our costs.”
(Additional reporting by Lin Miao-jung; Editing by Sugita
Katyal and Ron Popeski)

Analysts expect the Taiwan dollar TWD=TP to trade around
that level through the end of the year due to monetary easing in
the United States that some say has begun flooding emerging
markets with money.

But the central bank’s statement does not necessarily herald
more capital controls, strategists say.

Major exporters, especially the island’s hallmark tech
products, in trade-reliant Taiwan have complained that a
surge in the Taiwan dollar since late September has hurt profits.
It rose about 3 percent on anticipation of U.S. monetary easing.

“If the Taiwan dollar breaks through T$30, we will find it
very difficult to do business,” said Lin Shing-san, vice
chairman of the Evergreen Group, which includes the world’s No.4
container shipping line, Evergreen Marine (2603.TW: Quote, Profile, Research, Stock Buzz), and Taiwan’s
No.2 airlines, Eva Airways (2618.TW: Quote, Profile, Research, Stock Buzz).

Small and medium-sized exporters will take a big hit while
larger firms can do more of their business in U.S. dollars, said
Rock Hsu, honourary chairman of the Taiwan Electrical &
Electronic Manufacturers’ Association.

Hsu is also chairman of Compal Electronics (2324.TW: Quote, Profile, Research, Stock Buzz), the
world’s No.2 contract l7aptop PC maker.

The statement by central bank Deputy Governor Chou A-ting
indicates the authority was concerned that the currency will hold
around T$30 with more appreciation possible, strategists say.

“It looks the central bank is pretty firm about the T$30
level for the time being. They would not let it rise above that,”
said an economist at a foreign bank.

However, new capital controls are unlikely because Taiwan has
already imposed some and they have had little impact on currency
prices, strategists say.

“This (central bank) statement is not surprising, as the
sentiment is expressed from time to time,” said Wai Ho Leong,
regional economist at Barclays Capital in Singapore. “They’re
still using the same argument that exporters cannot handle too
rapid of an exchange rate rise.

“It heralds a lot of concern in the central bank,” he said.

($1=T$30.4)

(Additional reporting by Jeanny Kao and Faith Hung; Editing by
Ken Wills)

Much like the novel’s hero, a boy named Pi, Taiwan has something of a second chance  at making itself shine after years of diplomatic isolation that has kept its global economic competitiveness clinging to a life vest. It gets that chance when audiences see the movie, now scheduled for release in 2012. But Taiwan has a long way to go as China has stolen its spotlight with a rapid economic ascent since the 1990s. For long-standing political reasons, Beijing actively squelches its offshore neighbor’s international profile.

In the book, a freighter taking Indian boy Piscine Molitor “Pi” Patel, his family and a zoo of wild animals sinks while steaming from India across the Pacific Ocean to North America. Pi is left stranded on a lifeboat with a Bengal tiger. He and the tiger survive 227 days at sea despite a natural distrust of each other as the boy gives the animal its space along with a sense of who’s boss.

About three quarters of the film will be shot on the beaches of Taiwan’s south coast and at a new studio fashioned from an old airport in the central Taiwan city Taichung, a publicist for 20th Century Fox Taiwan said. The other 25 percent takes place in India, and 17-year-old Indian-born actor Suraj Sharma, who was chosen from 3,000 applicants, will play Pi.

Lee, best known for “Brokeback Mountain” and “Crouching Tiger, Hidden Dragon,” last shot a film in Taiwan in 1994 with “Eat Drink Man Woman.” He chose the island this time as a “beautiful place for the story,” the publicist said.

Still, things could go wrong for Lee (and Taiwan), the director hinted to reporters at a recent news conference. That’s because filming includes what Lee called three of the most unpredictable elements in making a movie: water, children and animals.

“I hope this will be a breakthrough,” the director said. “We have been through some struggles but we still have a long way ahead…I hope everyone enjoys the process.”

Following is a summary of key risks to watch in Taiwan:

INTEREST RATE POLICY AND CAPITAL CONTROLS

Taiwan’s central bank raised interest rates in September
for the second time since February 2009 [ID:nTOE68T09L] and is
expected to hike them 12.5 to 25 basis points each quarter
through the end of 2011.

However, some analysts say a severe enough slowdown in the
United States, Taiwan’s second biggest single-country export
market after China, could force a pause in those hikes for a
quarter or two. The previous interest rate, a record low 1.25
percent, was an emergency measure to fight the economic
downturn.

The rate hikes signal that Taiwan authorities believe their
$414 billion export-reliant economy is gathering steam despite
sluggish CPI [ID:nTOE69405Z] and stubborn unemployment that
remains at an unusually high 5.08 percent. [ID:nTPV002084]

Recent rate hikes also seek to stop fast-rising property
prices in Taipei from becoming an asset bubble.

The central bank remains wary of “hot money” inflows,
especially as the Taiwan dollar TWD= and other Asian asset
prices have risen sharply since Sept. 27 on expectations of
quantitative easing in the United States.

Some hot money departed earlier in the year due to risk
aversion driven by the euro zone debt crisis and fears of a
double-dip recession in the United States. But in October,
central bank governor Perng Fai-nan said about T$120 billion
($3.9 billion) in foreign funds in Taiwan were not invested in
securities [ID:nTPV002070], a hint that those funds may be
invested in the currency market against his wishes.

Dealers in Taipei believe the interventionist central bank
takes steps almost daily to stop speculation in the forex
market. It bought roughly $5 billion in U.S. dollars during the
month to Oct. 25, according to a survey of traders by IFR
Markets.

Earlier this year, the monetary authority warned banks to
follow regulations when trading foreign exchange forward
contracts, another move to discourage hot money.
[ID:nTOE60L08O].

Economists say the Taiwan dollar stands to gain in tandem
with the Chinese yuan CNY=CFXS if Beijing allows its
nonconvertible unit to appreciate. The island’s currency is an
ideal proxy for the yuan due to Taiwan’s fast-growing trade
ties with China.

What to watch:

— Economists expect the central bank to raise rates again
by 12.5 to 25 basis points at its December quarterly policy
meeting. [ID:nTOE65O026]

— Capital controls could be tightened if hot money pours
into Taiwan as the United States eases monetary policy. Easing
would boost currencies in emerging markets such as Taiwan’s,
where investors are expected to seek higher returns than they
can get in developed markets.

— The central bank’s response to any appreciation of the
Taiwan dollar due to a firmer yuan.

CHINA-TAIWAN RELATIONS

Taiwan President Ma Ying-jeou’s promotion of closer
economic ties with China after decades of hostility culminated
on June 29 in a landmark free-trade deal that cuts import
tariffs on about 800 items and helps the island’s financial
sector. [ID:nECFA]

That economic cooperation framework agreement (ECFA)
handily cleared the island’s parliament in August and is
expected to take full effect on Jan. 1, setting the stage for
talks with China on potentially thousands more tariff cuts.

The deal positions Taipei to sign free trade deals with its
other major trading partners [ID:nTOE67805H] as China is seen
muting its usual opposition to such agreements. Beijing
normally forbids its diplomatic allies, including the world’s
most powerful nations, from official deals with Taiwan as it
sees the island as part of its territory rather than a
sovereign nation. But Taiwan and Singapore, the island’s No.6
trade partner, said on Aug. 5 they would begin FTA talks
[ID:nTOE67400Q] and China voiced no objections.

Taiwan says China will allow the island to sign FTAs with
its major partners under the World Trade Organisation
framework, advancing Taiwan’s long-term competitiveness. Other
Asian nations have toyed with how to approach Taiwan about
FTAs, but domestic concerns on both sides such as agricultural
tariffs may prove a tough nut to crack. [ID:nTOE68202K]

In further signs of improved China-Taiwan ties, the
island’s stock market opened this year to qualified Chinese
investors, while trade and shipping links established since
2008 will help boost trade and reduce the risk of military
conflict.

But the issue of ties with China remains highly divisive in
Taiwan and there is always the risk of new controversies,
especially as voters in the island’s major cities elect local
leaders on Nov. 27 with the winning party having a strong shot
at the 2012 presidential race. China, for its part, is
gradually ramping up pressure on Ma’s government to discuss
tough political issues, analysts say.

What to watch:

— Washington is weighing Taiwan’s request for F-16 fighter
jets, a sale described as a “red line” for Sino-U.S. relations,
and other arms packages, but any decision is not expected until
at least 2011 as U.S. officials seek better China ties
[ID:nTOE66M04U]. If a sale threatens ties with China, the
impact on Taiwan asset prices will be negative, with stocks of
firms that have benefited from greater access to China hit the
hardest.

— Results of the local elections covering about 60 percent
of the electorate. If the ruling party wins resoundingly, it
would signal support for more trade dialogue with China. If the
opposition gains, China relations could sour.

— Talks on further tariff reductions that could help
Taiwan’s biggest industries such as electronics, PVC plastics
and machine tools. Beijing may resist making concessions on
these as it wants to develop its own industries.

— Firm statements from Beijing, insisting that Taiwan
begin negotiating military and political issues with China.

GOVERNMENT EFFECTIVENESS

Ma has a strong mandate to govern, as the ruling
Nationalists (KMT) control parliament and the presidency. This
has bolstered government effectiveness and helped to avoid
political deadlock.

But widespread criticism of the response to Typhoon Morakot
last year dented government popularity and led to a cabinet
reshuffle. That storm, the worst in 50 years, triggered
mudslides that killed about 700 people.

A sudden deal in October to allow U.S. beef imports despite
mad cow disease fears also backfired, prompting Taiwan’s
parliament to scrap part of the agreement and irritating
Washington. But the president, coached by party insiders on
public relations, has avoided major flaps since early 2010 and
stayed clear of any mass criticism over damage following two
typhoons this year.

Still, the China-friendly KMT faces what analysts see as a
mounting threat from the anti-China opposition Democratic
Progressive Party (DPP). If the DPP retakes the presidency in
2012, that shift of power would likely freeze economic ties
with Beijing pending new dialogue.

What to watch:

— Markets are unlikely to react to domestic political
controversies unless they significantly weaken the KMT’s hold
on power, the strength of which will become clearer after the
Nov. 27 local elections. If that happens, the risk of policy
deadlock and frostier ties with China would be a drag on
markets.

ECONOMIC REFORM

Taiwan limits foreign portfolio investment and restricts
foreign direct investment in some sectors. As the economy
recovers, investors will start to focus again on whether
economic reform may relax some restrictions. In a sign of
growing focus on competitiveness, the government has cut the
corporate income tax rate from 20 to 17 percent.
[ID:nTOE64S005]

What to watch:

— Any announcement from the government on economic reform
and specific measures to boost foreign investment. This would
be broadly positive for the stock market.

(Editing by Daniel Magnowski)

Following is a summary of key Taiwan risks to watch:

* INTEREST RATE POLICY AND CAPITAL CONTROLS

Taiwan’s central bank raised interest rates in June for the
first time since the crisis, and again on September 30. It is
expected to hike them 12.5 to 25 basis points each quarter
through to end-2011 [ID:nSGE65N0D0]. However, some analysts say
a severe enough slowdown in the U.S. economy could pause those
hikes for a quarter or two.

The hikes signal that Taiwan authorities believe the $414
billion export-reliant island economy is gathering steam
despite sluggish CPI [ID:nTOE63602D] and stubborn unemployment
that remains at an unusually high 5.11 percent [ID:nTPV001880].
Forecast-beating GDP growth [ID:nTOE67F07A] showed that the
monetary authority’s plan is on track.

The central bank also remains wary of “hot money” inflows
that have buoyed Asian asset prices. Some of this money has
already departed: Foreign funds sold a net $4 billion of Taiwan
stocks .TWII in May and another net $1.25 billion in August
due to risk aversion driven first by the euro zone debt crisis
and later fears of a double-dip recession in the United States.

The interventionist central bank moves almost daily to stop
speculation in the island’s currency market, dealers in Taipei
believe. Earlier this year it warned local and foreign banks to
follow regulations when trading foreign exchange forward
contracts, another move to discourage hot money
[ID:nTOE60L08O].

But economists say the undervalued Taiwan dollar stands to
catch up with other Asian currencies on any gains in the
Chinese yuan CNY=CFXS, especially following Beijing’s
flexible yuan policy announced in June.

The Taiwan dollar is an ideal proxy for the nonconvertible
Chinese unit due to the island’s fast-growing trade ties with
China, and the central bank is expected to allow some currency
appreciation as a result of China’s policy shift.

What to watch:

— Economists expect the central bank to raise rates again
at a quarterly policy meeting in December by 12.5 to 25 basis
points. [ID:nTOE65O026]

— Capital controls could be tightened further if hot money
resurfaces as an issue. This would push down the Taiwan dollar.
However, analysts do not expect the kind of rigid capital
controls that would cause major outflows. [ID:nHKG263506]

— The central bank’s response to any appreciation of the
Taiwan dollar due to a firmer yuan.

* CHINA-TAIWAN RELATIONS

Taiwan President Ma Ying-jeou’s promotion of closer
economic ties with China after decades of hostility culminated
on June 29 in a landmark free trade deal that cuts import
tariffs on about 800 items and helps the island’s financial
sector. [ID:nECFA]

That economic cooperation framework agreement (ECFA)
handily cleared the island’s parliament in August, despite
noise from the opposition, and is expected to take full effect
on Jan. 1, setting the stage for talks with China on the next
round of tariff cuts.

The deal also positions Taipei to sign free trade deals
with its other major world trading partners [ID:nTOE67805H] as
China is seen muting its usual opposition to such agreements.
Beijing normally forbids its diplomatic allies, including the
world’s most powerful nations, from official deals with Taiwan
as it sees the island as part of its territory rather than a
sovereign nation. But Taiwan and Singapore, the island’s No.6
trade partner, said on Aug. 5 they would begin FTA talks
[ID:nTOE67400Q] and China voiced no objections.

In further signs of improved China-Taiwan ties, the
island’s stock market opened this year to qualified Chinese
investors, while trade and shipping links established since
2008 will help boost trade and reduce the risk of military
conflict.

But the issue of ties with China remains highly divisive in
Taiwan and there is always the risk of new controversies,
especially as 2010 is a local election year with the winning
party having a strong shot at the 2012 presidential race.

In local elections last December, seen as a test of Ma’s
policy of engagement with Beijing, his government lost some
ground to the anti-China opposition that Beijing hopes to keep
out of power.

What to watch:

— Washington is weighing Taiwan’s request for F-16 fighter
jets, a sale described as a “red line” for Sino-U.S. relations,
and other arms packages, but any decision is not expected until
at least 2011 as U.S. officials seek better China ties
[ID:nTOE66M04U]. If a sale threatens ties with China, the
impact on Taiwan asset prices will be negative, with stocks of
firms that have benefited from greater access to China hit the
hardest.

— Results of the Nov. 27 local elections covering about 60
percent of the electorate and Taiwan’s major cities. If the
ruling party wins big, it signals support for more trade
dialogue with China. If the opposition gains, China relations
could sour.

— Talks on further tariff reductions that could help
Taiwan’s biggest industries such as electronics, PVC plastics
and machine tools. Beijing may resist making concessions on
these as it wants to develop its own industries.

— China’s blessing for free-trade agreements between
Taiwan and other governments, including the world’s biggest
economies, would advance Taiwan’s long-term competitiveness
strategy and signal improvement in Beijing’s ties with Taipei.

* GOVERNMENT EFFECTIVENESS

Ma has a strong mandate to govern, as the KMT controls
parliament and the presidency. This has bolstered government
effectiveness and helped to avoid political deadlock.

But widespread criticism of the response to Typhoon Morakot
last year dented government popularity and led to a cabinet
reshuffle. That storm, the worst in 50 years, triggered
mudslides that killed about 700 people.

A sudden deal last October to allow U.S. beef imports
despite mad cow disease fears also backfired, prompting
Taiwan’s parliament to scrap part of the agreement and
irritating Washington. Cabinet flaps that saw one minister quit
and another offer his resignation have raised further questions
about ruling party leadership ability [ID:nTOE62B01S], although
the president has avoided major flaps over the past four
months.

The high degree of polarisation between the two major
parties, the China-friendly Nationalists (KMT) and the
anti-China opposition Democratic Progressive Party (DPP), can
undermine policy continuity and increase uncertainty.

What to watch:

— Markets are unlikely to react to domestic political
controversies unless they significantly weaken the KMT’s hold
on power, the strength of which will become clearer after the
Nov. 27 local elections. If that happened, the risk of policy
deadlock and frostier ties with China would be a drag on
markets.

* ECONOMIC REFORM

Taiwan puts limits on foreign portfolio investment and
restricts foreign direct investment in some sectors. As the
economy recovers, investors will start to focus again on
whether economic reform may relax some restrictions. In a sign
of growing focus on competitiveness, the government has cut the
corporate income tax rate from 20 to 17 percent.
[ID:nTOE64S005]

What to watch:

— Any announcement from the government on economic reform
and specific measures to boost foreign investment. This would
be broadly positive for the stock market.

(Editing by Andrew Marshall)

Following is a summary of key Taiwan risks to watch:

* INTEREST RATE POLICY AND CAPITAL CONTROLS

Taiwan’s central bank raised interest rates in June for the
first time since the crisis, and is expected to hike them 12.5
to 25 basis points each quarter through to end-2011
[ID:nSGE65N0D0]. However, some analysts say a severe enough
slowdown in the U.S. economy could pause those hikes for a
quarter or two.

The hikes signal that Taiwan authorities believe the $414
billion export-reliant island economy is gathering steam
despite sluggish CPI [ID:nTOE63602D] and stubborn unemployment
that remains at an unusually high 5.17 percent [ID:nTPV001880].
Forecast-beating GDP growth [ID:nTOE67F07A] gave support to
this view.

The central bank also remains wary of “hot money” inflows
that have buoyed Asian asset prices. Some of this money has
already departed: Foreign funds sold a net $4 billion of Taiwan
stocks .TWII in May and another net $1.25 billion in August
due to risk aversion driven first by the euro zone debt crisis
and later fears of a double-dip recession in the United States.

The interventionist central bank moves almost daily to stop
speculation in the island’s currency market, dealers in Taipei
believe. Earlier this year it warned local and foreign banks to
follow regulations when trading foreign exchange forward
contracts, another move to discourage hot money
[ID:nTOE60L08O].

But economists say the undervalued Taiwan dollar stands to
catch up with other Asian currencies on any gains in the
Chinese yuan CNY=CFXS, especially following Beijing’s
flexible yuan policy announced in June.

The Taiwan dollar is an ideal proxy for the nonconvertible
Chinese unit due to the island’s fast-growing trade ties with
China, and the central bank is expected to allow some currency
appreciation as a result of China’s policy shift.

What to watch:

— Economists expect the central bank to raise rates again
at a quarterly policy meeting in September by 12.5 to 25 basis
points, and make a similar move in December. [ID:nTOE65O026]

— Capital controls could be tightened further if hot money
resurfaces as an issue. This would push down the Taiwan dollar.
However, analysts do not expect the kind of rigid capital
controls that would cause major outflows. [ID:nHKG263506]

— The central bank’s response to any appreciation of the
Taiwan dollar due to a firmer yuan.

* CHINA-TAIWAN RELATIONS

Taiwan President Ma Ying-jeou’s promotion of closer
economic ties with China after decades of hostility culminated
on June 29 in a landmark free trade deal that cuts import
tariffs on about 800 items and helps the island’s financial
sector. [ID:nECFA]

That economic cooperation framework agreement (ECFA)
handily cleared the island’s parliament in August, despite
noise from the opposition, and is expected to take full effect
on Jan. 1, setting the stage for talks with China on the next
round of tariff cuts.

The deal also positions Taipei to sign free trade deals
with its other major world trading partners [ID:nTOE67805H] as
China is seen muting its usual opposition to such agreements.
Beijing normally forbids its diplomatic allies, including the
world’s most powerful nations, from official deals with Taiwan
as it sees the island as part of its territory rather than a
sovereign nation. But Taiwan and Singapore, the island’s No.6
trade partner, said on Aug. 5 they would begin FTA talks
[ID:nTOE67400Q] and China voiced no objections.

In further signs of improved China-Taiwan ties, the
island’s stock market opened this year to qualified Chinese
investors, while trade and shipping links established since
2008 will help boost trade and reduce the risk of military
conflict.

But the issue of ties with China remains highly divisive in
Taiwan and there is always the risk of new controversies,
especially as 2010 is a local election year with the winning
party having a strong shot at the 2012 presidential race.

In local elections last December, seen as a test of Ma’s
policy of engagement with Beijing, his government lost some
ground to the anti-China opposition that Beijing hopes to keep
out of power.

What to watch:

— Washington is weighing Taiwan’s request for F-16 fighter
jets, a sale described as a “red line” for Sino-U.S. relations,
and other arms packages, but any decision is not expected until
at least 2011 as U.S. officials seek better China ties
[ID:nTOE66M04U]. If a sale threatens ties with China, the
impact on Taiwan asset prices will be negative, with stocks of
firms that have benefited from greater access to China hit the
hardest.

— Results of the Nov. 27 local elections covering about 60
percent of the electorate and Taiwan’s major cities. If the
ruling party wins big, it signals support for more trade
dialogue with China. If the opposition gains, China relations
could sour.

— Talks on further tariff reductions that could help
Taiwan’s biggest industries such as electronics, PVC plastics
and machine tools. Beijing may resist making concessions on
these as it wants to develop its own industries.

— China’s blessing for free-trade agreements between
Taiwan and other governments, including the world’s biggest
economies, would advance Taiwan’s long-term competitiveness
strategy and signal improvement in Beijing’s ties with Taipei.

* GOVERNMENT EFFECTIVENESS

Ma has a strong mandate to govern, as the KMT controls
parliament and the presidency. This has bolstered government
effectiveness and helped to avoid political deadlock.

But widespread criticism of the response to Typhoon Morakot
last year dented government popularity and led to a cabinet
reshuffle. That storm, the worst in 50 years, triggered
mudslides that killed about 700 people.

A sudden deal in October to allow U.S. beef imports despite
mad cow disease fears also backfired, prompting Taiwan’s
parliament to scrap part of the agreement and irritating
Washington. Cabinet flaps that saw one minister quit and
another offer his resignation have raised further questions
about ruling party leadership ability [ID:nTOE62B01S], although
the president has avoided major flaps over the past four
months.

The high degree of polarisation between the two major
parties, the China-friendly Nationalists (KMT) and the
anti-China opposition Democratic Progressive Party (DPP), can
undermine policy continuity and increase uncertainty.

What to watch:

— Markets are unlikely to react to domestic political
controversies unless they significantly weaken the KMT’s hold
on power, the strength of which will become clearer after the
Nov. 27 local elections. If that happened, the risk of policy
deadlock and frostier ties with China would be a drag on
markets.

* ECONOMIC REFORM

Taiwan puts limits on foreign portfolio investment and
restricts foreign direct investment in some sectors. As the
economy recovers, investors will start to focus again on
whether economic reform may relax some restrictions. In a sign
of growing focus on competitiveness, the government has cut the
corporate income tax rate from 20 to 17 percent.
[ID:nTOE64S005]

What to watch:

— Any announcement from the government on economic reform
and specific measures to boost foreign investment. This would
be broadly positive for the stock market.

(Editing by Andrew Marshall)