That crisis mood could intensify on Dec. 3, when candidates from Chen's Democratic Progressive Party (>DPP) and the opposition Kuomintang (KMT) face off in local elections that are seen as a referendum on Chen's presidency. Polls show the KMT ahead by up to 14 percentage points in races such as that for mayor of Taipei County, the island's biggest. Voters are not only disgruntled because of government scandals but also because Chen has failed to navigate banking and fiscal reforms -- needed to curb a ballooning budget deficit -- through the opposition-controlled Taiwan Parliament. In addition, Chen has alienated the business community with his strident anti-China policies, which are hurting the island's growth prospects. He has stalled applications by Formosa Plastics and chipmakers ProMOS Technologies Inc. and Powerchip Semiconductor Corp. to build plants in China, for instance, and refuses to budge on direct transport links with the mainland. "There is a general sense of being stuck in a logjam," says Richard Vuylsteke, executive director of the American Chamber of Commerce in Taipei.
Key businesspeople are deserting Chen. Longtime supporter Hsu Wen-long, founder of the Chi Mei Group, which owns plastics plants in China, has criticized the Taiwan President for pursuing a path toward independence from Beijing. Y.C. Wang, the octogenarian chairman of Formosa Group, and Evergreen Group founder Chang Yung-fa snubbed Chen in last year's heated presidential race by switching allegiance to the KMT, which is pursuing closer ties with the mainland.
All this is taking its toll on the economy. Gross domestic product is expected to grow 3.8% this year, says brokerage CLSA, down from 5.7% in 2004. The budget deficit could hit 3.7% of GDP by yearend, up from 3.2% last year. Consumer confidence has hit a 33-month low, and the stock market has fallen 6.4% since January.
Taiwan's business leaders are anxious not to isolate the island. "The most important potential boost for the Taiwan economy would be an opening of blocked economic channels with China," says Duncan Wooldridge, an economist with UBS () in Hong Kong. Ma Ying-jeou, the incoming KMT chairman and popular Taipei mayor, is expected to take his party into the next election on a ticket of direct trade links and warmer relations. If Chen's DPP fares poorly on Dec. 3, he'll soon face challenges not only from the KMT but from his own party, as politicians start to jockey for the presidency in 2008. If he doesn't reverse his fortunes, Chen may be remembered most for what he didn't accomplish. By Matt Kovac in Taipei EDITED BY Edited by Rose Brady