FACTBOX-Key political risks to watch in Taiwan

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By Jonathan Standing

TAIPEI, Sept 11 (Reuters) - Some eight months 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.

Taiwan has cut its 2012 economic growth forecast eight times in the last year, highlighting the depth of the challenge facing the government in its second term.

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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.

On top of Europe's financial woes, the U.S. recovery is looking less certain while China, Taiwan's largest trading partner, is facing a sharp slowdown in domestic demand, boding ill for Taiwanese exporters.

Taiwan's export orders contracted for a fifth straight month in July, and in August it cut its full-year 2012 economic growth forecast for the eighth time in a year, to 1.66 percent from an original 4.58 percent in August 2011. Taiwan is on course for its slowest full-year growth rate since 2009.

At its next quarterly meeting on Sept 20, the central bank is expected to leave interest rates unchanged at 1.875 percent, choosing to focus on controlling inflation, which has spiked as bad weather hit the island's food production, rather than cutting rates to help growth.

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

In the face of the 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 in 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.

The resignation of the finance minister over a controversial capital gains tax, plus the arrest of the cabinet secretary-general over allegations of bribery, have added to the sense of malaise.

President Ma Ying-jeou's approval rating stands at around 21 percent, according to one recent poll, and the ruling party recently lost a rural by-election, a defeat seen as a comment on the government's performance.

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.

Chinese President Hu Jintao told Taiwan's delegate at the recent Asia Pacific Economic Cooperation (APEC) forum that Beijing's current policy towards Taiwan will continue after he steps down later this year as part of China's planned leadership transition.

Earlier this year Taiwan's Ma told Reuters in an interview that he was hopeful China's next rulers would maintain improving relations, and that leader-in-waiting Xi Jinping's understanding of cross-Strait issues would help keep economic cooperation on track.

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 ${esc.dollar}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.

Ma 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:

- Insistence from Beijing on political talks.

- Any change in Taiwan policy during China's leadership transition. (Reporting by Jonathan Standing; Editing by Daniel Magnowski)