Kuomintang's Victory in Taiwan
Seems Certain to Cheer Investors

The Kuomintang's overwhelming victory in Taiwan's legislative elections brings the island closer to having a government intent on improving ties with China after years of worsening discord that have hampered its economy.

The Kuomintang, or Nationalist Party, took 81 of 113 legislative seats in Saturday's vote, a larger-than-expect win that gives the party powerful momentum toward its goal of retaking the presidency in another election in March, after eight years as the opposition.

Saturday's results were a staggering blow for soon-to-retire President Chen Shui-bian, who has championed the island's independence and defiantly rejected Beijing's claim that it is part of China's rightful territory. Mr. Chen's Democratic Progressive Party – which had been the largest single party in the legislature – won just 27 seats Saturday. Mr. Chen, who will leave office in May, resigned as DPP chairman to take responsibility for the setback.

The outcome seems certain to cheer investors, who have long complained that antipathy between Taiwan and China under Mr. Chen has constrained Taiwan's stock market and economy. Taiwan's benchmark stock index ended Friday at 8,029.31, about 9% below its level when Mr. Chen first took office in May 2000. Diana Wu, a trader at Capital Securities Corp., predicted the index could test highs of 8,400 or more today. Analysts also predicted the New Taiwan dollar would strengthen.

The outcome seems certain to cheer investors, who have long complained that antipathy between Taiwan and China under Mr. Chen has constrained Taiwan's stock market and economy. Taiwan's benchmark stock index ended Friday at 8,029.31, about 9% below its level when Mr. Chen was first elected in March 2000. Diana Wu, a trader at Capital Securities Corp., predicted the index could test highs of 8,400 or more Monday. Analysts also predicted the New Taiwan dollar would strengthen.

Attention will now focus on whether Ma Ying-jeou, the Harvard-educated former Taipei mayor running as the Kuomintang's candidate for president, can carry the momentum to victory on March 22. Polls show him running a healthy lead against DPP candidate Frank Hsieh, a former premier who himself is widely seen as more moderate than Mr. Chen on cross-strait policy. Mr. Hsieh said Sunday he would take over as DPP chairman.

While Mr. Ma doesn't favor near-term unification with China, he also rejects Mr. Chen's confrontational approach and has said he hopes to improve ties. As a result, many analysts think a victory by the Kuomintang candidate could ease tension in the Taiwan Strait, and reduce the chances of a military conflict there that could also embroil the U.S., Taiwan's most important backer.

Analysts say Beijing would also be far more willing to deal with Mr. Ma on issues like ending a ban on direct flights between the two sides put in place shortly after the Kuomintang fled to Taiwan in 1949 amid civil war with the Communists. "There would be progress in investments in China for the financial industry and a possible breakthrough regarding direct flights to China if Ma wins," said Ms. Wu of Capital Securities.

China's government had no immediate reaction to Saturday's vote, but Chinese analysts said the outcome could lead to improved ties. "We're very happy about the big failure of Chen Shui-bian," said Hou Ruoshi, an expert on foreign affairs at China's Zhejiang University. "It raises the possibility of a victory for Ma Ying-jeou."

The Kuomintang now has its first outright majority in the legislature in more than a decade, though in recent years it has narrowly controlled the body through alliances with smaller parties. A victory for Mr. Ma in March would create a unified government and break the gridlock that has slowed policymaking during Mr. Chen's tenure. "With a unified government, it'd be easier for the government to push through reforms, including more fiscal spending, cross-strait reforms," said Frederic Neumann, a Hong Kong-based economist for HSBC. He expects Taiwan's economic growth to slow to about 4% this year – analysts estimate it grew by more than 5% in 2007 – but says he will raise that forecast if Mr. Ma wins in March.

Saturday's vote is a dramatic reversal for the DPP – the first time in four elections since 1995 in which it failed to increase its share of legislative seats. Mr. Chen and his party have in recent years made headway embedding a stronger sense of Taiwan's separate identity into its political culture.

That reversed Kuomintang efforts during most of its five-decade rule to inculcate the population with a mainland Chinese identity – requiring people, for example, to speak Mandarin instead of the Fukienese dialect that residents commonly call "Taiwanese." Today, even Kuomintang politicians like Mr. Ma, who was born to parents from mainland China, must frequently speak Taiwanese at campaign rallies. Support for unification with China is tiny.

But many in Taiwan have tired of Mr. Chen's combative approach, and his repeated efforts to use identity issues at election time. Perhaps more importantly, a series of corruption scandals involving people close to Mr. Chen has shattered his party's reputation for probity – at a time when the Kuomintang has made progress cleaning its longstanding reputation for corruption.

Mr. Chen accepted "full responsibility" for Saturday's defeat. "The results of this election are the worst setback in the history of the DPP," he told reporters. "I am truly apologetic and embarrassed by the election results."