In October 1949 Chairman Mao's communists took control on the mainland and Chiang Kai-shek withdrew his Kuomintang army to Taiwan, taking with him China's entire gold reserves. More than 1.5 million refugees fled with him adding to resentment among native Taiwanese against what they saw as a mainland invasion.

In December Chiang declared Taipei the temporary capital of China, vowing that he would eventually "recover the mainland". He also issued a decree imposing perpetual martial law - an order not rescinded until 38 years later. As part of the claim to represent all China, all the institutions of mainland government were transferred to Taiwan, including the parliament, which had representatives for all mainland provinces.

Chiang's government imposed harsh restrictions on civil and political liberties, jailing or executing thousands of opponents and clamping down on the use of native Taiwanese dialects.

Initially the US kept well out of the stand-off between the two Chinas. But with the outbreak of the Korean War in 1950 and Chinese troops fighting in Korea, Taiwan was seen as part of the west's bulwark against communist expansionism. The US poured in money and military supplies. A planned communist invasion in 1950 was thwarted when President Truman ordered the US 7th Fleet into the Taiwan Straits.