President Ma Ying-jeou said Taiwan faces new challenges with closer trade and economic ties with China that have resulted in rapidly increased exchanges between the two sides.

His seven-month-old government has been pushing the improved relations that the opposition Democratic Progressive Party fears could compromise the island's sovereignty. But Mr Ma assured the public the fear is unwarranted.

'As we deepen our ties with the mainland, we will aggressively seek to maintain our sovereignty and dignity,' he said. 'We will in the meantime highlight our political, social and cultural distinctiveness so Taiwan can guide the long-term development of relations in a positive way.'

Since taking office in May, Mr Ma has sought to turn the corner on the anti-China stance of his predecessor, Chen Shui-bian, whose pro-independence policies strained relations with the mainland for most of his eight years in office.

China and Taiwan split in 1949 amid civil war, but Beijing considers the self-governed island a part of its territory and has warned any move by Taiwan to formalise its de facto independence could be met with war.

Mr Ma's New Year message came a day after Chinese President Hu Jintao responded positively to Taiwan's recent initiatives, and proposed a military trust mechanism and negotiations to end Taiwan's diplomatic isolation.

'Taiwan's involvement in events held by international organisations could be reasonably arranged through pragmatic negotiations,' Mr Hu said.

Aware of Taiwanese' reluctance to unify with an authoritarian mainland, Mr Ma has promised not to discuss a union with China during his term. But many Taiwanese fear he could be swayed by his China-friendly Nationalist Party and remain sceptical about his many initiatives.

The two sides agreed last November to begin direct air and shipping services across the Taiwan Strait, ending a nearly six-decade ban on regular links. Regular direct flights resumed Dec 15.

Political exchanges have grown more slowly. China continues to refuse to recognise Taiwan's government and blocks the island's participation in the United Nations and other multinational organisations.

Trade and civil exchanges have grown steadily over the past two decades, with Taiwanese investing an estimated US$150 billion (S$214.7 billion) on the mainland and hundreds of thousands of islanders living and working in China. -- AP