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China looms large as Taiwan's political pendulum swings

TAIPEI   The pro-independence Democratic Progressive Party continues to poll well ahead of the Beijing-friendly Nationalist Party in Taiwan's presidential race. Assuming the lead holds up on election day, Jan. 16, relations with China are likely to be the biggest variable for the island's economy in 2016.

     China claims Taiwan as part of its territory even though the two sides split amid a civil war in 1949. Despite simmering cross-strait tensions, Taiwanese businesses were among the first foreign investors to embrace China after the Tiananmen Square crackdown in 1989. Over the past two decades Taiwan and China have developed close, complementary economic ties, thanks in part to their geographic proximity and cultural bonds.

     In 2005, Beijing enacted a law authorizing the use of force to achieve unification. Since that same year, however, China has been Taiwan's No. 1 trading partner, with the annual bilateral flow totaling some $140 billion. Cross-strait exchanges picked up -- and friction abated -- after Nationalist President Ma Ying-jeou took office in 2008. Some say relations are the best they have been in six decades. 

     Yet China's status as Taiwan's top export destination, as well as the island's main source of imports, is starting to sting. 

     China's economic growth rate is thought to have slipped below 7% last year, and the slowdown is hampering Taiwan's trade-dependent economy. At the same time, the emergence of mainland technology companies is threatening the island's bread-and-butter industry.

     One of the reasons the Nationalist Party, or Kuomintang, is trailing the DPP is that many voters feel Ma's efforts to court China have failed to drive economic growth. On the contrary, there is a widespread perception that Ma's approach has only allowed Beijing to encroach on the island -- economically and politically. 

"SO MANY COMPETITORS"   Taiwan's economy contracted in the third quarter of 2015 -- the first step backward since 2009. For the full year, gross domestic product may grow a mere 0.75%, according to Ray Chou, an economist at Taiwan's Academia Sinica. Within the tech sector, which accounts for 60% of Taiwan's total exports, manufacturers of touch panels and liquid crystal displays are feeling the most heat from Chinese rivals.

     AU Optronics, Taiwan's top display maker, fell behind China's BOE Technology Group in TV panel shipments for the first time in 2015, according to Taipei research company WitsView. BOE is now the No. 4 player in the global market. 

     A Chinese supply glut in the large panel segment has drawn AUO into a painful price war. Large TV panels account for nearly half of the Taiwanese company's revenue. 

     Meanwhile, TPK Holding, a leading touch module supplier to Apple, posted a record loss of 19.39 billion New Taiwan dollars ($590 million) for the third quarter. TPK Chairman Micheal Chiang said he did not foresee "that there would be so many competitors rising over the past five years." This, he said, "has led to an unexpected, fierce war to slash prices."

     The Chinese offensive intensified in late 2015, when Beijing-backed Tsinghua Unigroup announced plans to buy 25% stakes in three chip assemblers in Taiwan, raising national security fears. "There is no room for such an acquisition before Tsinghua Unigroup can clearly address public concerns," DPP leader and presidential front-runner Tsai Ing-wen said in December.

     Tsai has vowed to maintain the status quo with Beijing and said she would not object to meeting Chinese President Xi Jinping in the future. Nevertheless, it is an open question whether she would be able to win the trust of Chinese officials and work with them effectively, should she be elected.  

     Memories of the DPP's last stint in government, from 2000 to 2008, are still fresh. Then-President Chen Shui-bian's anti-China, pro-independence rhetoric drew sharp responses, including military threats, from Beijing. Lately, Chinese officials have emphasized that they still object to Taiwan independence, and that military action remains an option.

     Tsai may need to look to Washington, which generally supports Taiwan and prioritizes cross-strait stability, for help in dealing with China, suggested Tung Chen-yuan, a visiting scholar at the University of California, Berkeley.

     "Right now the DPP and the Chinese Communist Party do not have communication channels nor mutual trust," Tung said. "In the end, they may need to talk through Washington [to ensure] smoother interactions."

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