By Caroline Gluck
BBC News, Taipei
Taiwan's President Chen Shui-bian has warned of growing economic and military threats from China.
The president's comments are likely to anger China
In his New Year address the president vowed to strengthen Taiwan's security.
In comments bound to anger China, he also suggested that the Taiwan could hold a referendum in 2007 to establish a new constitution.
This is a move that Beijing has strongly warned against, fearing that it could lead to Taiwan declaring formal independence.
China regards Taiwan as a renegade province that should be reunited with the mainland.
With his personal popularity at an all-time low and his party still reeling from a crushing defeat in last month's local elections, many had expected President Chen Shui-bian to adopt a conciliatory approach in his speech.
Instead he signalled that the government would take a tougher stand towards China and pursue domestic policies to strengthen the island's national identity.
Repeating a pledge to push for constitutional reform, he said a national referendum on a new constitution could be held by 2007 if conditions were ripe.
The president warned of the growing military threat from China, noting that it had targeted 784 missiles at Taiwan.
He also urged the opposition-controlled parliament to approve a special budget which has been blocked for more than a year to allow Taiwan to purchase arms from the US to be able to better defend itself.
He warned of the risk to companies investing in China, suggesting the government would remain firm against growing pressure by the business lobby to remove remaining barriers on trade and investment with the mainland.
The government would adopt a policy of "pro-active management and effective liberalisation" to guard Taiwan's economic security, he said, warning that the island should not "lock in" its economic lifeline in China.
Despite the political frictions across the Taiwan Strait, local businesses have invested as much as $100bn in China and have been calling on the government to approve direct transport links.