On this island where fantasy has long dictated policy, reality is taking hold and may help improve relations with China and stimulate democratic change at home. The myth has long been that the ruling Nationalist Party, which retreated to Taiwan after losing a civil war to Communist forces in 1949, is still the legitimate government of China. That myth has long been used to justify the party's policy of no official contact with the rival government in Beijing. It also has long been used to justify the party's monopoly on political power. But events of the past week, culminating in the inaugural address of President Lee Teng-hui on Sunday, indicate the days of fantasy are drawing to a close. Lee was sworn in for a six-year term after being elected by the electoral college and stressed his commitment to democracy. The Nationalist government still calls itself the ``Republic of China'' and says reunification with the Chinese mainland is the ultimate goal. But on Wednesday, Hau said something no top official had previously acknowledged in public: The reality is that China today is ``one country with two governments.'' In his inauguration speech, Lee urged markedly improved relations with Beijing and ``channels of communication'' that could eventually lead to talks on reunification. In effect, Lee signaled a desire to end the 40-year-old hard-line policy toward the Chinese Communists known as the ``three nos'' _ no official contact, no negotiations and no compromise. There is a catch. The Nationalists want Beijing to renounce the threat of force against Taiwan, end its policy of isolating Taiwan diplomatically and scrap one-party Communist rule. China on Monday rejected such preconditions, saying Lee was ``ignoring the universally accepted fact that the People's Republic of China is the sole legitimate government representing all Chinese people.'' While Taiwan does not expect an immediate breakthrough, its leaders hope relations will improve as civilian and business contacts expand. Indirect trade across the Taiwan Straits was $4 billion last year, and Taiwan residents made 1 million visits to the Chinese mainland since such travel was first allowed in late 1987. ``We want gradually to expand our contact by peaceful ways,'' government spokesman Shaw Yu-ming recently told foreign journalists. ``We have to move in measured steps. ... It's not a very action-packed kind of approach.'' Lee also said he wanted to quickly scrap the 1947 ``Mobilization for the Supression of the Communist Rebellion.'' Not only would this mean Taiwan would no longer view the Beijing government as a rebel group, but it would also lift temporary legal provisions that have guaranteed the Nationalist Party a lock on power. Under the provisions, the Legislature and electoral college are dominated by Nationalists, elected on mainland China before the civil war defeat. The theory is they cannot be replaced until their constituencies are recaptured and new elections held. But the mainland-elected parliamentarians are dying fast and the island's 20 million people, 85 percent of whom are native Taiwanese, want a greater say in government. Lee on Sunday gave a two-year timetable for replacing the provisions with constitutional amendments that would establish ``a great model of political democracy for all times.'' He also stressed the importance of securing fair competition among political parties, indicating an understanding that future legitimacy must come from the people. Still, the promise of greater democracy is viewed skeptically by many students and opposition party members. They view Lee's decision to nominate the country's only four-star general as premier a step back toward the Nationalists' authoritarian past. But the nomination of Defense Minister Hau Pei-tsun also is viewed less sinisterly as an attempt by Lee to shore up his support among party elders and to crack down on rampant corruption and crime. Government spokesman Shaw said military rule or a return to authoritanism would be impossible. ``Nobody in this land, no party, no group ... no individuals, can turn the clock back,'' he said. ``Military rule, military dictatorship or even authoritarian-type of politics cannot ... be accepted by our people.''