FACTBOX-Five political risks to watch in Taiwan

TAIPEI Dec 15 (Reuters) - The threat of conflict between Taiwan and China is becoming increasingly remote, analysts say, but investors still face a range of political risks.

Following is a summary of key Taiwan risks to watch:

* CROSS-STRAIT RELATIONS

President Ma Ying-jeou's promotion of closer economic ties with China has boosted trade and reduced the risk of military conflict. The government is expected to press ahead with achieving an economic cooperation framework agreement -- essentially the precursor to a free trade deal. Preparations for a currency clearing system with China are more than 50 percent complete, officials said this month. But the issue of ties with China remains highly divisive in Taiwan and there is always the risk of new controversies, as occurred in September 2009 with a visit by the Dalai Lama. In local elections in early December, seen as a test of Ma's policy of engagement with Beijing, his government lost some ground to the opposition. The United States backs China diplomatically but remains Taiwan's staunchest informal ally, infuriating Beijing whenever it sells arms to the island. Obama will continue to sell arms, U.S. diplomats say.

Key issues to watch:

-- Progress in closer economic ties. Markets will watch to see whether economic detente stays on track.

-- The possibility of a historic meeting between Ma and Chinese President Hu Jintao, tipped to take place in 2012 if Ma wins reelection that year, would be a further indication of reduced tensions.

* GOVERNMENT EFFECTIVENESS

Ma has a strong mandate to govern, as the KMT controls parliament and the presidency, which has been positive for government effectiveness and avoiding political deadlock. But widespread criticism of the response to Typhoon Morakot dented the government's popularity and led to a cabinet reshuffle. The high degree of polarisation between the two major parties, the China-friendly Nationalists (KMT) and the anti-China opposition Democratic Progressive Party (DPP) has also raised questions about long-term political stability and government effectiveness.

Key issues to watch:

-- Evidence of whether the government is operating more efficiently following the reshuffle.

* CORRUPTION

Taiwan is generally rated as being far freer of damaging corruption than most of its regional peers. But many corruption rankings, including the World Bank's World Governance Indicators, suggest there has been a significant deterioration in control of corruption in recent years. Graft is considered most common in local government, but life sentences given to former president Chen Shui-bian and his wife on corruption charges in September 2009 thrust the central government back into the spotlight.

Key issue to watch:

-- Taiwan's rating in global corruption perceptions rankings. If investors think Taiwan's corruption levels are worsening, markets will suffer. In Transparency International's 2009 Corruption Perceptions Index, released last month, Taiwan's corruption score was slightly worse than 2008, but its ranking improved to 37th from 39th out of 180 countries or regions.

* INTEREST RATE POLICY AND CAPITAL CONTROLS

The central bank says it will maintain loose monetary policy for now, and most economists expect rates to stay on hold this year and into early 2010. But policy tensions could rise if the central bank feels the need to start focusing on containing inflationary pressures while the government remains committed to sustaining the nascent economic recovery.

Another key economic policy issue is coping with flows of "hot money" that have been buoying Asian asset prices. Taiwan announced a ban last month on foreign funds investing in time deposits, and the central bank said it hoped that the $11 billion of foreign speculative money would start flowing out.

Key issues to watch:

-- Comments by ministers and the central bank on monetary policy. Markets will watch for hints that rate rises will resume, or for signs of policy conflict with the central bank.

-- Any sign that capital controls could be tightened further, if hot money inflows do not subside.

* ECONOMIC REFORM

Taiwan continues to place limits on foreign portfolio investment and restricts foreign direct investment in some sectors. As the economy recovers, investors will start to focus again on whether economic reform may relax some restrictions. Key issues to watch:

-- Any announcement from the government on economic reform and measures to boost foreign investment. (Compiled by Andrew Marshall and Ralph Jennings)