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FACTBOX-Key political risks to watch in Taiwan

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(Globalpost/GlobalPost)

By Faith Hung

TAIPEI, Jan 30 (Reuters) - A year after elections returned the Nationalist government to power, significantly reducing the chance of the Taiwan Strait becoming a global flashpoint, the focus is firmly on how the export-dependent economy can navigate a worsening global environment.

In late November, Taiwan raised its 2012 growth outlook for the first time in over a year, to 1.13 percent, as demand for its hi-tech electronic exports picks up in its top markets, China and the United States.

It expects growth of 3.15 percent this year, up from an earlier forecast of 3.09 percent.

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

VULNERABLE ECONOMY

Taiwan is one of the most open of Asia's exporters, with an exports-to-GDP ratio of 74 percent. Around half of its exports are hi-tech products, making it particularly vulnerable to falls in external demand.

Orders for Taiwan's exports in December grew 8.5 percent from a year earlier, with a jump in orders from Europe providing further evidence that global demand for Asian goods is slowly improving.

At its most recent quarterly meeting in December, the central bank left its benchmark discount rate unchanged at 1.875 percent, saying economic growth was expected to be mild in 2013 and inflation pressures were easing. It was the sixth straight quarter the policy meeting kept the rate on hold.

For the latest poll of forecasts for GDP, inflation and interest rates, see TWPOLL1.

In the face of the global downturn, the government has unveiled a series of initiatives aimed at increasing investment into Taiwan by foreign companies and encouraging domestic firms to invest more at home.

Taiwan also faces pressure from free trade agreements being negotiated among its neighbours, which could put its exporters at a disadvantage. It has started trade talks with New Zealand and Singapore, and with South Korea on an investment protection pact. It is also set to restart talks with the United States on expanding economic ties.

The government has had a rough spell since winning re-election last January. A series of policy flip-flops plus rises in state-controlled fuel and power prices having brought street protests and created the impression that the administration lacks direction.

What to watch:

- Any further revisions to GDP growth expectations, and interest rate changes.

- Government stimulus for the economy.

- Foreign investor interest in Taiwan stocks, a bellwether of appetite for risk.

Talks over free trade agreements.

GETTING ALONG WITH CHINA

China claims Taiwan as its own and has not renounced the use of force to recover the island, even as it pursues a policy of pushing economic integration through incentives that it hopes will lead to a full political union.

The Chairman of China's Securities Regulatory Commission (CSRC) Guo Shuqing visited Taiwan in late January for an unprecedented meeting with the island's top financial regulator. The CSRC said it will allot investment quotas of up to 100 billion yuan ($16 billion) for Taiwanese who want to put money into China's financial markets under the Renminbi Qualified Foreign Institutional Investor (RQFII) programme.

The CSRC also announced a series of measures to open its securities and futures markets to Taiwan.

A clearing system for yuan transactions in Taiwan is also being prepared. China's central bank and the Bank of China Ltd's Taipei branch signed a clearing agreement this month for yuan transactions in Taiwan, completing the last remaining step required for the launch of yuan-based transactions in Taiwan in February.

The two sides moved closer towards full economic integration with the signing in August of a long-awaited pact on a clearing system for the Chinese yuan, bringing together their financial systems, where ties have long lagged those in other business areas.

Officially recognised Taiwan investment in the mainland has reached about $120 billion since records began in 1991, and 1 million Taiwanese are estimated to be working in China.

Still, links with China remain a highly divisive issue in Taiwan, where sentiment in favour of continuing the status quo - if not for outright independence - remains very strong.

Several political irritants also remain despite booming business ties, such as Taiwan's counter-claims to islands in the South and East China Seas, where the mainland has been increasingly assertive about its own territorial claims. U.S. arms sales to Taiwan also rankle with Beijing.

Taiwan's President Ma Ying-jeou has said he has no timetable for political talks, but has floated the idea of a peace treaty with China in 10 years, subject to a referendum in Taiwan.

What to watch:

- Progress of economic integration.

- Insistence from Beijing on political talks. (Editing by Daniel Magnowski)

http://www.globalpost.com/dispatch/news/thomson-reuters/130129/factbox-key-political-risks-watch-taiwan