President Chen Shui-bian’s political difficulties continued but renewed sovereignty pledge - not to allow Taiwan to “become second Hong Kong”. Chen survived recall vote in parliament but over half of legislature voted against him (two-thirds majority needed to force referendum). James Soong of opposition People First Party vowed to pursue no-confidence vote against government (which would only require simple majority). Relations with China improved slightly as sides agreed to start cross-Strait flights during holidays.

President Chen Shui-bian ceded control of cabinet to PM after scandal involving family member; remains in charge of foreign and defence policy, and ties with China. Taiwan unveiled first formal national security policy 20 May, pledging to increase defence spending by 20% and urging China to cooperate in establishing military buffer zone. Policy asserts China set on long-term military expansion to control Taiwan. According to annual Pentagon report China increased number of ground troops in straits area by 25,000.

Chinese President Hu Jintao called for talks during visit of former leader of opposition Kuomintang party Lien Chan to Beijing. Lien urged direct cross-Strait flights and boosting of trade. Hu called for Taiwan to return to 1992 “one China” principle. Violence in Solomon Islands blamed partly on continuing battle between Beijing and Taipei for diplomatic recognition.

President Chen Shui-bian and opposition held competing rallies promoting rival positions on independence and relations with China. Kuomintang and People’s First Party leaders visited U.S. to explain opposition to U.S. arms deal they see as overpriced and unnecessary. China announced defence spending increase of 14%.

Tension raised between Beijing and Taipei after President Chen Shui-bian announced National Unification Council and its guidelines would “cease to function” 27 February. Move brought condemnation from Beijing who previously called Chen “troublemaker and saboteur”.

President Chen Shui-bian appointed Su Tseng-chang as prime minister, replacing Frank Hsieh, who resigned following ruling DPP’s December defeat in local elections. Hsieh warned Chen’s hardline stance on China alienating DPP voters. Taiwan’s latest bid for observer status at World Health Organisation blocked by China.

Ruling DPP suffered major defeat in 3 December local elections. Opposition Kuomintang, with policy of dialogue with China, won 14 posts in 23 constituencies including key Taipei county. Setback for DPP likely to trigger major structural changes ahead of 2008 presidential poll. President Chen Shui-bian called for increased arms purchases and warned against greater economic ties to mainland.

Parliamentary  negotiations  over  reduced $11 billion arms package with U.S. “hijacked” by opposition parties with slim majority in legislature who see deal as overpriced and unnecessary. President Chen Shui-bian hopes to reach compromise after 3 December county elections. Chen called Taiwan “sovereign and independent” 4 October, but made clear will not seek substantive change to status quo before leaving office 2008.

Beijing warned Washington against helping Taiwan protect itself from missile attack; also repeated commitment to “no first use” policy and pledged not to engage in nuclear arms race. Head of main opposition Kuomintang party promised to forge direct links with mainland if party returns to power in 2008.

Taipei mayor Ma Ying-jeou sworn in as chairman of opposition Kuomintang party 19 August. Chinese President Hu Jintao offered unprecedented congratulatory message. Ma pledged to continue efforts to build cross-Strait ties. President Chen Shui-bian said Taiwan to cut $4 billion off proposed $15 billion purchase of U.S. arms to increase parliamentary support for deal.