"Realizing the complete reunification of the motherland is the common desire of all Chinese people, including Taiwan compatriots," Cao said in comments carried by the People's Daily, the Communist Party's mouthpiece.

"We have the determination and the ability to defend national sovereignty and territorial integrity," Cao said on Thursday during celebrations to mark the 76th anniversary of the founding of the 2.5-million-strong People's Liberation Army on August 1.

"We will never allow anyone to separate Taiwan from China in any way," said Cao, a vice-chairman of the Central Military Commission and a member of the Communist Party's elite Politburo.

The Pentagon said on Wednesday Beijing was boosting military spending and deploying more ballistic missiles to prepare for a possible conflict in the Taiwan Strait aimed at bringing the democratic country to its knees before the US has time to intervene.

China's recent hard-line statements about cross-Strait relations, and the military buildup, "may reflect an increasing willingness to consider the use of force to achieve unification, or, at a minimum, to demonstrate an upgraded military capability in hopes of deterring Taiwan from moving further toward independence," the Pentagon report said.

One Taiwanese military expert said the most crucial issue facing the island was its lack of attention to defense.

"The most serious problem facing Taiwan at the moment is its people lack the desire to fight. Taiwan has not fought a war in the past decades and its people do not want to fight one now," said retired general Shuai Hua-ming. "This is our weakest point.

"Building a strong national defense is expensive. Taiwan's defense spending has not increased much over the past years. The United States is trying to tell Taiwan, if you want to protect itself, you must be willing to pay a price," Shuai said.

White House also warns on China's military aims

By Charles Snyder

STAFF REPORTER IN WASHINGTON

The White House has warned that China's speedy missile buildup aimed at Taiwan is "destabilizing" and has repeated its call for both sides to settle cross-Strait issues peacefully.

The comments, by White House spokesman Scott McClellan, came a day after the Pentagon's report on China's increased military threat.

"We've made it very clear that China's rapid build-up of weapons, particularly missiles opposite of Taiwan is something that is destabilizing, McClellan told reporters. "And we will fulfill our commitments under the Taiwan Relations Act."

McClellan said the US has "always remained committed" to that law, and has "expressed concerns about the Chinese taking steps to increase their weaponry."

"But, again, the best way for the two sides to resolve their differences is through a peaceful dialogue. And we encourage the parties to pursue that dialogue," he said in response to a series of questions about the report, which was released Wednesday.

Developing credible military options for a Taiwan scenario remains the focus of China's military modernization, the report the Pentagon's latest annual report to Congress on China's military posture said. It also painted a picture of an increasingly sophisticated Chinese military, with Chinese defense spending expected to double in coming years.

The tough-worded report came as Washington is in delicate negotiations with Beijing over the North Korean nuclear threat, trying to get China to take a more active role in getting negotiations going, aimed at revolving the crisis.

That fact has prompted some Washington observers to wonder why the report was issued now, rather than being delayed until the situation was calmer as the Pentagon has done in the past.

In related news, the US and China are planning an exchange of top-level military visits later this year in what appears to be a near-return to normal bilateral military relations, but US officials say the visits will not affect US military commitments to Taiwan.

China's Minister of National Defense, General Cao Gangchuan, is slated to visit Washington in November, and the chairman of the US Joint Chiefs of Staff, General Richard B. Myers, is planning to travel to Beijing soon after that, Pentagon officials say. In addition, the two sides are planning to conduct reciprocal ship visits to each other's naval bases.

The meetings, which were arranged "a couple of months ago," according to a US defense official, will be highest-level military talks of the George W. Bush presidency.

While planning for the trip is not yet firm, the two sides are expected to discuss "big picture" items. these will include "common security interests and concerns," the official said.

Taiwan is certain to come up during the meetings, but the visits could have an indirect benefit on US-Taiwan relations, a defense official told the Taipei Times.

"It will help the Chinese officers gain an appreciation and understand the seriousness of our commitment to help Taiwan under the Taiwan Relations Act" and America's demand for a peaceful settlement of cross-Strait issues, the official said.

"They will learn this face-to-face, and it may change some Chinese thinking" toward the Taiwan issue, he said.

The decision to upgrade US-China military ties does not reflect any change in US policy toward Taiwan, he said.

The visits will be the culmination of efforts by Beijing and Washington to improve military-to-military relations since the EP-3 incident in April 2001 caused Washington to break off military contacts.

Investment policies misguided, dangerous

By Lai Chen-chang

`A plan to allows China-based Taiwanese firms to attract domestic capital is inappropriate because it contradicts the domestic demand for capital.'

President Chen Shui-bian reportedly wants to allow China-based Taiwanese businesses whose annual revenues exceed NT$10 billion (US$291 million) to be listed on the nation's stock market, in an effort to boost the domestic economy and encourage capital inflow. This is an attempt to entice overseas Taiwanese businesses to set up operation centers here. If the policy is passed, however, it may significantly affect the operation of the capital market, crowding out capital for domestic investment.

Although the nation was transformed from a capital-importing country in the 1940s and 1950s into a capital-exporting one, domestic investment is insufficient due to the economic downturn in recent years. Hence, the government encourages local companies to issue American depository receipts (ADRs) in order to make up for the lack of money through foreign capital. A plan to allows China-based Taiwanese businesses to attract domestic capital is inappropriate because it contradicts the domestic demand for capital.

A company takes numerous factors into consideration when establishing an operation center, including market, transportation, production, regulations and environment. The source of capital is just one of these factors.

Unless regulated, permission for China-based Taiwanese businesses to be listed on the TAIEX may not be equivalent to their establishment of headquarters here. Such companies may not set up business headquarters in this country, but they could attract more domestic capital and take it abroad. This would be disadvantageous for the development of the nation's capital market.

Taiwanese businesspeople in China are fully aware of the high risk of investing there. When they decide to invest in China, they mostly try to raise funds by borrowing from banks -- not making investments with their own money. If their investments in China succeed, then both they and the banks are happy. If the investment fails, it is the banks that are landed with more bad loans. This is also why local banks' non-performing loan ratios are so high.

Domestic banks have long suffered from the huge debts left behind by China-based Taiwan-ese businesses. Yet while the banks are striving to reduce their bad loans, the government wants to open another channel for these Taiwanese businesses, allowing them to raise funds in the nation's capital market once again. This will turn the "liabilities" on their businesses' financial statements into "assets." However, such actions may hollow out Taiwan's capital market.

As for the goals of attracting China-based Taiwanese busi-nesses to set up operation centers in this country to stimulate the economy, and encouraging inflow of capital, this is simply wishful thinking.

Lai Chen-chang is an associate professor at National Taipei College of Business.

A timely reminder of China's threat

According to a recent Pentagon report, the number of Chinese short-range ballistic missiles aimed at Taiwan has now increased to 450. The report also estimates the number of missiles will increase by 75 per year over the next few years. This is a 50 percent increase from earlier growth estimates by the US. The report also warns that unless Taipei undertakes the necessary improvements to its military power, China will have the capability to rapidly destroy this nation's airfields within the next few years. It will also be able to use short-range ballistic missiles, cruise missiles, special forces and other military power to rapidly undermine Taiwan's ground, air defense, and command and control facilities.

The content of the report was no surprise because China's military ambitions have always been obvious. What's worrying is that Taiwan's military preparedness has been declining quickly due to the sluggish economy and the relaxation of psychological defenses caused by cross-strait interactions.

One possible strategy of the People's Liberation Army (PLA) would be to launch a fierce surprise attack featuring information warfare, air raids, missile attacks, a naval blockade and amphibious and airborne blitzes that will target key strategic areas, causing massive destruction and thereby forcing Taipei to surrender. Beijing could also gradually turn up the military heat on Taiwan, forcing this nation's leaders to adopt policies that are in China's interest. China's military buildup is not only aimed at Taiwan but is also meant to fight forces from the US or other countries that may emerge. Beijing may adopt asymmetrical tactics to put US aircraft carrier fleets coming to Taiwan's help into a complicated war situation. China is a solid threat to both Taiwan and the US.

What is even more difficult to guard against than the PLA's rising military might is China's attempts to unravel Taiwan's national will and to block US intervention in cross-strait issues by diplomatic and other non-military means. Now that the US needs Beijing to influence North Korea regarding Pyongyang's nuclear program, it could become more aloof to the Taiwan issue. This could set the stage for China to force Taiwan to the negotiating table under terms favorable to Beijing. This is what Taipei must guard against first and foremost.

The increasing trade and economic exchanges across the Taiwan Strait are the most damaging to the nation's psychological defense. After moving their companies and money to China, many Taiwanese businesspeople have become Beijing's spokespersons, demanding direct links and supporting the "one China" principle. Hong Kong's fate since its handover to Beijing gives us a glimpse into the gradual-invasion model, which is harder to guard against than a military invasion. Only after seeing what was meant to be included in the territory's national security bill, also known as Article 23 legislation, did the people of Hong Kong realize that "one country, two systems" is a sugar-coated poison pill. Even a demonstration by 500,000 people against the proposed legislation not be able to salvage the interests of the people in the territory.

As long as China does not renounce the use of force against Taiwan, it will be the nation's biggest security threat. Taiwan will be forced to adopt a defensive "porcupine" response. The Pentagon report is a timely warning both to Taiwanese and Americans that they cannot afford to let down their guard against Beijing's threat.