Panama has switched diplomatic recognition from Taiwan to China after a century of having only commercial relations with the Asian giant.
Panamanian President Juan Carlos Varela announced the change, which entails breaking off formal relations with Taiwan.
Varela said in a televised address that it is the "correct path for our country."
A joint statement yesterday evening says Panama and China are recognizing each other and establishing ambassador-level relations as of the same day.
It adds that Panama recognizes only one legitimate China and that Taiwan "forms an inalienable part of Chinese territory."
China is the second-biggest client of the Panama Canal and the leading provider of merchandise to a free-commerce zone in the Caribbean city of Colon.
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