February 2, 2010 / 7:08 AM / 10 years ago

China versus Taiwan: How the political standoff may end

BEIJING/TAIPEI (Reuters) - China has expressed fury at Washington’s announcement of a new arms package for self-ruled Taiwan, saying it threatens the task of peaceful reunification between the two sides.

China and Taiwan, once at the brink of war before a thaw in relations, have avoided discussing their political future and instead focused on forming closer economic ties.

A non-violent solution is iffy more than 60 years after the Communist victory in the Chinese civil war, which forced the defeated Nationalist Party (KMT) to flee to Taiwan.

China, the world’s third-largest economy and a veto-wielding member of the U.N. Security Council, claims sovereignty over ethnically Chinese Taiwan and has not renounced the use of force to bring the proudly democratic island under its control.

China has set no timetable for reunification, though the leadership has said it will not let the status quo last forever.

Here are the basic scenarios:


This proposal, which would bind the two sides under the same wide economic umbrella but guarantee autonomy for both, has been floated in the past by leaders in Taiwan.

China might spurn the idea for lacking the full sovereignty that it seeks, but the two sides may agree on some kind of fudge that lets Beijing claim one country while giving Taiwan enough autonomy to say it governs itself.

China has long hoped to use the Hong Kong and Macau model of “one country, two systems” to entice Taiwan. Both territories are officially part of China, but given a high degree of autonomy, including a largely free press.

But China essentially appoints leaders for Hong Kong and Macau, with a degree of democracy. Taiwan is unwilling to give up choosing its leaders after a long struggle for free elections.

Foreign firms with links to China’s cheap labor could base regional headquarters in Taiwan to take advantage of stronger laws, transparency and higher standards of living while still being within a hour’s flight of major Chinese cities.

Investors, who generally want to see tech-reliant Taiwan tie up with economic powerhouse China, would park more money long term in Taiwan’s stock and currency markets.


Unlikely any time soon, as a formal announcement to establish Taiwan as a nation and drop the island’s official name, the Republic of China, would spark military action from China.

War would have a devastating economic impact, regionally and perhaps globally, especially if China rained missiles on Taiwan and Taiwan struck back by targeting the metropolis of Shanghai.

Since China-friendly Taiwan President Ma Ying-jeou took office in 2008, he has sought to reduce tension through a series of trade and economics talks with Beijing.

But widespread economic or social problems at home could goad China into rattling its saber or even starting a war against Taiwan as a way of diverting attention from domestic issues and rallying the people behind a broadly nationalist cause.

Without rapid U.S. intervention, Taiwan’s military would likely quickly be defeated.. Yet with China being the world’s largest holder of U.S. government bonds, Washington would think carefully before getting involved.

Investors would rapidly pull out of Taiwan if war broke out or if the island’s ties with China entered a long period of instability after independence.

China would see less impact due to its stronger economic growth and vast domestic market. But if a war prompted U.S. sanctions, the Chinese economy could spiral downwards and foreign investment would plummet, at least in the short term.

Direct Taiwan-China flights, direct shipping routes and China’s investment in Taiwan stocks would likely be suspended, while Taiwan’s tech-heavy economy would focus away from the fast-growing Chinese market to the United States and Europe.


Not as unlikely as once thought, given Taiwan’s growing economic reliance on China. From last month, Chinese qualified investors were allowed to trade in Taiwan stocks, and the two currencies are set to become mutually convertible.

Noted Chinese economist Hu Angang once said that China could force Taiwan to its knees simply by applying economic sanctions.

But as fewer Taiwanese identify themselves as Chinese and instead take pride in local culture, while China shows few signs of democratizing, Taiwan is cold to reunification at present.

If the two sides were to be unified under a system that left Taiwan with its stronger legal environment, foreign firms could find the island an attractive investment destination, with easy access to mainland China’s enormous economy.

Long-term investors would park more money in Taiwan markets.

Investor sentiment would cool if Taiwan’s democratic transparency were compromised by Communist rule, or if China limited foreign investor involvement in Taiwan’s money and stock markets, assuming they were still allowed to exist.

Editing by Bill Tarrant

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