PENGHU - Taiwan President Ma Ying-jeou on Wednesday presided at the first live-fire drill in five years of the island's largest annual war games.

The hour-long exercise on the coast of Penghu, a group of islands in the Taiwan Strait just 140km away from mainland China, is not expected to cause tension between Taiwan and China.

The two sides have inked 18 cooperation pacts including a free-trade deal since Mr Ma came into power and are now in talks to set up representative offices in each other's territory.

The drill, however, comes amid concerns from the United States that Taiwan is neglecting its military even as it transitions to a volunteer force.

The US is Taiwan's main ally and weapons supplier.

Only last month (March), Washington's former top envoy to Taiwan William Stanton said that the island's sliding military budgets have left it vulnerable to Chinese attack and may have contributed to low morale among Taiwanese troops, which have been hit by a recent spate of alleged spying for China.

Taiwan spent only 2.2 per cent of its GDP on defence last year, down from 3.8 per cent in 2004.

It is also moving from a conscription to volunteer system which will see its 270,000-strong military shrink to 210,000 mostly professional soldiers, while compulsory military service has been shortened from one year to four months.

Mr Ma himself was criticised last year for going on a tour of Taiwan's allies in Africa while the annual exercise - named Han Kuang or Han glory - was underway.

But a day before Wednesday's drill, the president said at a videoconference with former US Secretary of State Condoleezza Rice and other scholars of Stanford University that strengthening defence capability remains one part of Taiwan's three-pronged security strategy.

The other two parts are institutionalisation of the cross-strait rapprochement as well as making Taiwan a "model world citizen".

He also described relations between Taiwan, China and the US as being at an equilibrium following five years of confidence-building under his administration.

Relations between Taiwan and China are at their best since Taiwan split from the mainland in 1949 following a civil war, but China maintains that it will reunify Taiwan, by force if necessary.