China takes aim at Taiwan after landmark pro-independence party win

Status quo not expected to maintain in Taiwan
Status quo not expected to maintain in Taiwan
Taiwan elections had a big surprise: Academic
Taiwan elections had a big surprise: Academic
TWSE chief: We're trying to prevent over-volatility
TWSE chief: We're trying to prevent over-volatility
Did Taiwan's elections impact markets?
Did Taiwan's elections impact markets?
Will Chinese tourists continue heading to Taiwan?
Will Chinese tourists continue heading to Taiwan?

After a decisive win over the weekend in both presidential and parliamentary elections in Taiwan, independence-leaning Democratic Progressive Party is quick to stress on how it is keen to maintain the status quo with China.

The reality, however, will be far more complex after eight years of cordial China-Taiwan relations under the Nationalist Party (KMT), analysts say.

"China will spike tensions with Taiwan mostly because I believe that the Chinese strategy will be to do so and to put Taipei--and by extension DC--on the defensive and in so doing, hopefully extract concessions," said Rupert Hammond-Chambers, MD Bower Group Asia and former president of the U.S. Taiwan Business Council.

DPP's presidential candidate Tsai Ing-wen won 56 percent of the vote on Saturday--ahead of the KMT's Eric Chu who got 31 percent of the vote and People First Party's candidate James Soong, who received just under 13 percent of the votes.

Supporters at Taiwan's main opposition Democratic Progressive Party (DPP) hold up piggy banks at a party fundraiser in Taipei.
Aside from China, trade, identity, pork are big issues in Taiwan election

DPP also won 68 out of 113 seats in parliament, the first time it has gained a majority in the house.

China-Taiwan relations have been strained since the end of the Chinese civil war in 1949 when the Nationalist Party (KMT) retreated to Taiwan after losing the Chinese Civil War. No armistice or peace treaty has ever been signed to mark the end of the conflict and the mainland views Taiwan as a renegade province that may be reclaimed by force, if necessary.

A former top negotiator, newly-elected Tsai has been softening her pro-independence position and has been consistent in sending the message that the status quo should be maintained.

Despite her moderating stance on independence, Tsai's win is tricky for Beijing as she has not committed to what is known as the "1992 Consensus", a tacit understanding reached that year at a meeting between semi-official representatives that acknowledges that there is only one China—although the mainland and Taiwan can have their own interpretation of what that stands for.

The mainland's state-controlled media was hard-hitting, with the Global Times warning Taiwan to not harbor any "hallucinations" of independence in an unsigned editorial with the title "Taiwanese choose Tsai, not independence".

The newspaper also warned Tsai that Taiwan would meet "a dead end" if she revisits the "dangerous path" of former DPP president Chen Shui-bian, whom Beijing views as a pro-independence troublemaker.

The Chinese social media was equally dismissive.

"No matter if you are blue or green, you will ultimately be red," wrote Chang Anjun, referring to the party colors of the KMT, the DPP and the CCP, respectively.

"Why do they put up such a big show for electing a provincial leader? It's indeed quite different under 'one country, two systems'" wrote another user, referring to Beijing's system of ruling over Hong Kong and Macau, former colonies of the U.K. and Portugal.

A supporter stands next to campaign flags of Tsai Ing-wen, presidential candidate for Taiwan's main opposition Democratic Progressive Party (DPP), during a rally in southern Kaohsiung on January 9, 2016.
Sam Yeh | AFP | Getty Images

The spotlight on geopolitical tensions however is overshadowing what is the real challenge for Taiwan and its people—the economy, which is facing headwinds from a slowdown in its largest trading partner China and changes in the employment landscape.

"The referendum in this election was not about China. It was primarily about where Taiwan is going from here. Taiwan is in an economic crisis; it needs to restructure; there are are no jobs and China is one of the factors but only one of the many (factors) ," said Syaru Shirley Lin, a professor at the Chinese University of Hong Kong.

Potentially as a nod to the slowdown at home, Taiwan has been jostling to join the Trans-Pacific Partnership, a large free trade pact led by the U.S.

"The TPP membership would force through Taiwan a significant, broad and deep period of reform for the economy and position it to compete most importantly with its primarily competitors in the region… Secondly, the axis to the TPP also would afford Taiwan a new era of relations with its Asia Pacific trading partners and allow the Taiwanese economy to maintain a degree of competitiveness," said Bower Group's Hammond-Chambers.

Despite the benchmark TAIEX index dropping to a five-month low on Monday, investors can expect limited impact from the outcome of the polls.

Joelian Tseng, head of research at Credit Agricole said history has shown that the market follows broader market trends. Previous eight-year terms with KMT and DPP at the helm have both witnessed ups and downs in the stock market, she said.

"We don't think markets are pricing in a very bad scenario for cross straits relationship. We believe that investors as well as voters do expect a pragmatic way of dealing with cross straits relationship for both the DPP and China," said Tseng.

Meanwhile, China's Global Times has decided to pan any DPP-led economic revival.

"Regardless of its relationship with the mainland, it's impossible for the DPP to reverse Taiwan's stagnant economy. No matter what kind of political philosophy Tsai espouses, she has to face up to the reality. She should know she has limited options."

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