Analysts expect economic and military coercion of Taiwan to continue. But with China’s economy still struggling and a U.S. election looming, the outcome of Taiwan’s election gives Beijing cover to resist ramping up pressure on Taiwan.

So far, the response from Beijing has been limited, with no signs of increased military activity off the island , and only Nauru, a Pacific Island nation, cutting off diplomatic ties with Taiwan in favor of China, said Bonny Lin, director of the China Power Project and senior fellow for Asian Security at the Center for Strategic & International Studies at a virtual briefing on Tuesday.

One reason analysts think China may be more restrained in the near-term is that the results aren’t as bad as they could have been in Beijing’s view. Lai didn’t win by as big of a margin as his predecessor, President Tsai Ing-wen, which Beijing interprets isn’t that wide of a mandate, analysts said.

Tsai won the last two elections with a 56% and 57% majority compared with Lai’s 40%. Lai also didn’t win a majority in the legislature, with the KMT, the China-leaning opposition party, gaining 15 seats, added Lily McElwee, a fellow and Freeman Chair in China Studies at the Center for Strategic & International Studies, at a briefing Tuesday.

“President-elect Lai Ching-te will not seek to disrupt relations with China, so while the cross-Strait political environment will remain tense, conflict continues to be very unlikely. Xi isn’t looking for an excuse to use force,” Andy Rothman, investment strategist at Matthews Asia and a former Taiwan desk officer for the State Department in the mid-1990s, tells Barron’s.

Chinese scholars also note some trepidation about this year’s U.S. election. “If China takes significant military action, that could impact U.S. elections in a way that could hurt Chinese interests—for example by making [the candidates] much more anti-China and China becoming a more central focus in the campaign,” Lin says.

There are likely flashpoints ahead: a potential arm sales to Taiwan up for debate in Congress, visits by U.S. officials as well as trade and tariff-related moves that could come later in the year. All of which could influence how China reacts.

Lin also cautions against too much complacency: “[Chinese officials] say they aren’t going to overreact to Lai. But when asked the how they would react if he does the same things as Tsai, they say they will have to react,” Lin says. “If we have high-level Congressional visits or a U.S. president-elect call with Lai, I don’t think the response will be the same (as it was with Tsai). They will escalate. There is more instability in 2024 than prior years because of the assumptions China has of Lai.”

For now, markets will focus more on fundamentals like the recovery in the chip cycle and increased spending around artificial intelligence that should help stocks like Taiwan Semiconductor and other Taiwanese chip companies to gain momentum from non-geopolitical fundamentals like a recovery in the chip cycle and increased spending around artificial intelligence.

The iShares MSCI China exchange-traded fund was down 3% on Tuesday. Rory Green, head of China research for TS Lombard, tells Barron’s he too expects Beijing to be measured ahead of the U.S. election season but that tensions will build again into next year.

While a cloud will loom over the market, Green says the geopolitical issue around Taiwan isn’t likely to get much attention until an event like another big military drill or blockade-type incident happens at which point Taiwanese stocks, at least, will reflect a higher risk premium and trade at a discount because of the risk.