Taiwan's outgoing government has launched a military exercise designed to counter a simulated Chinese invasion amid hopes for better ties.

TV footage from cable channel TVBS showed armored personnel carriers passing through streets to a military command center in Taipei.

In the scenario for the Yushan exercise, held each year, it is 2020 and China has launched an all-out attack on Taiwan's east coast using its first aircraft carrier, according to the National Security Council.

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Outgoing President Chen Shui-bian said last week that the exercise was needed because of China's 15-year military buildup.

"As the Chinese military has been enhancing its capability, we are holding this military exercise to ensure the government can still operate smoothly under sudden attack," Chen said.

Tuesday's military exercise began as President-elect Ma Ying-jeou pushes for improved ties with Beijing and a group of Chinese businessmen toured the island to consider millions of dollars in possible investments.

China and Taiwan split amid civil war in 1949. China considers the self-ruled island to be part of its territory and pledged to bring the island under its rule, by force if necessary.