Political status quo in Taiwan, truce hopes rise in Gaza

• Taiwan’s independence-leaning party DPP won the Presidency again but with a weaker mandate. We look for continued tensions but not new escalation in the Taiwan Strait. EU Commission proposes economic security initiative aimed at China.

• After more than three months of intense fighting in Gaza, hopes for a ceasefire have risen after Israel offered a two month pause in war in exchange of Hamas releasing hostages. Meanwhile, US and its allies’ attacks against the Houthis in the Red Sea continue, and the risk of regional escalation remains.

• War extends to the Baltic Sea as Ukraine’s drones hit a major Russian gas exports terminal near the city of St. Petersburg. Ukraine has also managed to down two Russian command aircrafts recently.

China: Taiwan election does not point to escalation

In the Taiwan election on 13 January the independence-leaning DPP secured the presidency again as expected as their candidate Lai Ching-te (also known as William Lai) won with a 6.7 percentage points margin to KMT's Hou Yu-ih. However, Lai's victory with 40.1% of the votes was smaller than his predecessor Tsai Ing-wen who got 57.1% in 2020 and DPP lost the majority in the Taiwanese parliament. Hence Lai is ruling with a weaker mandate having support from less than half of the population. Lai's victory was also secured by keeping a more moderate tone on independence than before he became presidential candidate suggesting that he is unlikely to increase confrontations with China. It reflects a mood among the Taiwanese where polls show a clear majority in favour of the status quo - and more so over the past year, which suggests they do not like to see the boat rocked too much towards China.

While tensions in the Taiwan Strait are likely to remain, the election result does not point to a further escalation in our view So far China’s response has been muted contrary to some commentators’ expectations of a sharp reaction if Lai won. It does not mean China has changed its’ fundamental stance and they did criticize governments that congratulated Lai’s victory. But we have not yet seen large scale military drills as some expected. The US president Joe Biden was quick to state that the US did not support Taiwanese independence. The domestic situations in both the US and China suggest that no one wants to stir up tensions too much this year. Biden probably does not want China to be an important theme in the Presidential campaign as Republicans could have the upper hand from being more hawkish than Biden. And on China’s side they would probably also like to see tensions dial down as they aim to revive weak economic confidence both domestically as well as among foreign companies and investors.

On other fronts, US-China relations also seem to be on a more stable footing, despite continued underlying frictions and rivalry. In early January, Chinese military officials visited Pentagon for the first time in four years showing that the defence dialogue has been reestablished. A US trade team visited China last week continuing dialogues on trade and financial issues. In summary, so far, the calming of US-China tensions following the Xi- Biden meeting in November last year has continued into 2024.

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