TAIPEI, TAIWAN -- Once regarded as obsessed with security, Taiwan's ruling Nationalist Party has been loosening many of its controls over politics, allowing more change on the island nation in the past year than in the past four decades, in the view of some observers.

At the same time, President Chiang Ching-kuo's efforts to liberalize the island's political system have met strong resistance, and for every two steps forward, Chiang appears forced to take one step back.

{Members of Taiwan's only active opposition party shouted antigovernment slogans at Chiang yesterday in unprecedented defiance of the ailing leader, United Press International reported. The protest by 11 members of the Democratic Progressive Party occurred at City Hall when Chiang, 77, a diabetic, appeared on stage in a wheelchair to mark the 40th anniversary of the constitution, witnesses said.

{No demonstration of any scope has ever been held in the presence of either president Chiang Kai-shek or his son and successor Chiang Ching-kuo, since the Nationalists fled to Taiwan in 1949. Witnesses said the men shouted protests about Taiwan's legislative system, but the president sat expressionless and appeared not to notice.

{Outside, more than 3,000 demonstrators waved banners and chanted slogans in support of the protests. The demonstrators made no attempt to storm barbed-wire barricades or challenge 10,000 riot police who patrolled nine blocks in the area.}

In July, the Nationalist Party, or Kuomintang, lifted martial law imposed in 1949. The move was a largely symbolic gesture because new security measures have been passed by the legislative assembly. The government also released dozens of political prisoners and promised to draft laws governing political parties and street demonstrations.

But the key issue now is parliamentary reform, a much more difficult task.

Most members of the National Assembly, the body that elects the president, and the Legislative Branch, the law-making body, were elected on the mainland in 1947 and 1948 and were forced to retreat to Taiwan following the defeat of Chiang Kai-shek by the Communists in 1949. A number are now too old to function effectively, and the Kuomintang realizes that it must allow more members of these two bodies to be elected from Taiwan if it is to create a semblance of democracy. An increasingly vocal middle class is also pressing for change.

The problem for the party is how to accomplish parliamentary reform without yielding too much power or abandoning the myth that the party still represents all of China.

"The old politicians are resisting any big change, but President Chiang {Ching-kuo} is determined to reform the parliament," said Raymond Tai, a party spokesman who directs its cultural affairs department.

In some ways, the Kuomintang resembles its hated enemy, the Chinese Communist Party. Like its mainland counterpart, it is built along Leninist lines.

The Kuomintang is also debating political reforms similar to those being discussed by the Communists on the mainland. In both Taipei and Beijing, the main idea is to curb the party interference in the day-to-day running of government.

But political change is coming so much faster in Taiwan than in China that it is intensifying the existing differences between the two systems. As some observers put it, Taiwan is becoming more "indigestible" for the mainland, which would like some day to control the breakaway island.

While the Kuomintang is now talking about allowing an expansion of independent publications, the Communists carefully control their press.

While the Kuomintang is now considering a proposal to hold elections rather than appointing the mayors of the major cities of Taipei and Kaohsiung, the Communists conduct only tightly controlled experiments in local elections.

The Kuomintang tolerates a small but vigorous opposition party, which is still technically illegal; the Communists reject the idea of a multiparty system.

Taiwan is now the scene of numerous street demonstrations over a variety of causes; the Communists ban student demonstrations and monitor those who are considered activists.

The Kuomintang's new confidence is based partly on prosperity. Taiwan officials recently announced that personal income here has reached an average of about $5,000 a year. Thanks to Taiwan's exports, the island's foreign exchange reserves have reached more than $70 billion, the third-largest in the world. Taiwan residents are engaging in increased trade with the mainland, bringing Taiwan and China in some ways closer together.

But their political systems are growing further apart.

Some Taiwan politicians argue, however, that if the mainland can continue with its current economic reforms, it may eventually create the economic base upon which a more democratic system can be built. Until then, however, few people on Taiwan are attracted to Beijing's proposals for "reunification."

"Democracy has to have a material base," said a young politician who belongs to the opposition Democratic Progressive Party. "But without real democracy on the mainland, there is no way that we would consider reunification."

The Kuomintang's decision to lift a ban on travel to the mainland last month has made some opposition party members nervous and caused them to intensify their calls for "independence" from the mainland.

Although small and technically illegal, the opposition gained about 25 percent of the vote in last December's election for a limited number of legislative seats.

Most opposition party members are native Taiwanese and resent the domination of the highest levels of the government by mainland Chinese who fled to Taiwan in the late 1940s. The Taiwanese identify less with the mainland than do those who were born in China.

On Dec. 10, opposition party leaders marched in Taipei calling for a separate state for Taiwan. The march was organized by the Formosan Political Prisoners Association, a recently formed group made up of former political prisoners, to protest the detention of two of its members who were arrested in mid-October for calling for an independent Taiwan.

A few years ago, the Kuomintang would have jailed the leaders of the demonstration. But so many demonstrations have been held here that ruling party officials proudly draw attention to them, arguing that such protests prove real democracy is emerging in Taiwan.

From July 1986 to June 1987, there were 1,462 public protests or demonstrations, nearly double the number in the previous one-year period, according to Ma Chi-hua of the National Chengchi University.

But there are limits to what will be tolerated.

Tsai Yu-chuan and Hsu Tsao-teh, the two dissidents who were arrested after proposing Taiwan independence, were recently indicted for sedition. One of two Taiwanese journalists who filed reports from the mainland earlier this year in defiance of a government ban is now likely to come under travel restrictions.

In a recent report on Taiwan, Asia Watch, an independent U.S.-based human rights monitoring group, took note of Chiang's liberalizing moves but concluded that citizens of Taiwan are "still deprived of internationally recognized civil and political rights."

The report said the continued restrictions "stand in stark contrast to the {Nationalist} government's stated commitment to respect for human rights and democratization."