Pressure is mounting on President Chen Shui-bian (陳水扁) to soften his anti-China stance after his party's drubbing in weekend local elections, which was seen as a no-confidence vote in him, analysts said.
Chen, who is serving his second and final term, had sought to boost his candidates' chances with pro-independence speeches, in contrast to the opposition parties' more conciliatory line toward Beijing.
"The 'China card' seems to have losing appeal," said political science professor Chen Yu-chu of Chinese Culture University.
"People want closer ties with the mainland and peaceful cross-strait relations instead of worsened confrontation."
The opposition Kuomintang scored a landslide victory in Saturday's polls, winning 14 of the 23 posts up for grabs, against only six for Chen's Democratic Progressive Party.
Leading DPP lawmaker Hong Chi-chang said he expected the poor showing to trigger an internal policy debate ahead of the 2008 presidential election, noting that many voters fear the party's independence-leaning policy could anger China.
"We need a pragmatic policy to help stabilize relations (with China) without compromising our sovereignty," said Hong, stressing the need for "creative ambiguity" - keeping Taiwan's future status vague.
Other analysts say a chastened DPP may make some concessions, such as agreeing to the business sector's demand for lower trade and investment barriers with China, but more decisive policy moves may take a back seat to cleaning house and dealing with an emboldened opposition.
"Chen Shui-bian will be a lame duck," said Philip Yang, a political scientist at National Taiwan University. "It was a no-confidence vote in Chen Shui-bian."
"He is certain to become a 'lame duck' president," said Chang Lin-cheng, political science professor at National Taiwan University. "After the stunning defeat, who is going to listen to him?"
The president has been under pressure to reconcile with China and improve economic ties with the mainland, Taiwan's biggest export market, where the island's companies are estimated to have poured in over US$100 billion in investments.
But China, which claims sovereignty over Taiwan, has refused to deal with the independence-leaning Chen and is likely to continue to ignore him, analysts said.
"These local elections will not change the economic environment and cross-strait relations will not change overnight," said Wu Ying-long, vice president of Masterlink Securities, a local brokerage.
"It is just that the market expects the DPP to rethink its policies and create a new mood ... We expect there will be a celebration rally in Taiwan stocks on Monday," Wu said.
Analysts said the DPP could not afford to warm too much to China as election losses in several traditional strongholds, including the country's largest constituency, Taipei County, pointed to already eroding support among former diehards.
"If you go for a relaxation of cross-strait relations, it's no good for the basic green voters and those voters are the only base they have left," said Yang. Green is the DPP party color.
DPP Chairman Su Chen-chang resigned after the party won less than 42 per cent of the vote compared to almost 51 percent for the KMT - but several DPP politicians were also calling for Chen to take responsibility.
"The party, even the president, need to do a comprehensive re-evaluation regarding the government's existing policies and even the officials serving the government," said DPP Legislator Kuo Cheng-liang.
Kuo was referring to a damaging corruption scandal involving a subway project in the southern city of Kaohsiung in which the president's former right-hand man, Chen Che-nan (陳哲男), was among 18 people indicted.
President Chen, who was re-elected last year on an anti-China platform, had sought again to shore up support for his party with more rhetoric portraying the KMT as China's representative in Taiwan.
The traditionally nationalist KMT has advocated closer ties with the mainland, and party leaders have recently made historic visits to Beijing.
Saturday's win was a major boost for KMT Chairman and Taipei Mayor Ma Ying-jeou (馬英九), who had gambled his political career on the vote and is expected to be the party's presidential candidate in 2008.
"There is no doubt that the triumph will be a plus for Ma in the next presidential race," Chang said, adding that more politicians would now hitch their wagons to this rising star.
Displaying his charisma during his islandwide tour, Ma's "one-man show" had contrasted with President Chen's campaign speeches, widely seen as sensationalist and heavy on China-bashing.
Analysts for investment bank Merrill Lynch had predicted before the vote that, in case of an opposition victory, Chen may read the electorate's mood and take a softer stance toward Beijing.
In case of an opposition win, the researchers said in their mid-November market report, "we expect that President Chen may consider further relaxation in the cross-straits policy."