By Faith Hung and Roger Tung

TAIPEI (Reuters) - Foreign investors seem to be undeterred by the possibility that growing tensions between Taiwan and China could precipitate fund outflows from the Taiwan market, the chairman of the Taiwan Stock Exchange told Reuters.

Up until the end of June, investors were going all in on Taiwan stocks with net foreign buying over the previous six months totalling $12 billion, a high water mark not reached since the first half of 2008. And Taiwan's benchmark index performance is up 16% in U.S. dollar terms this year, among the best benchmark performances in Asia.

But the net buying rally quickly changed course over these past two months, shifting to a net selling of T$83.9 billion ($2.62 billion) for July and T$106.6 billion so far in August.

Taiwan Stock Exchange Chairman Sherman Lin said in an interview this was a natural plateau after a rally rather than a sign that foreign funds are fleeing the market.

"Foreign investors have recently trimmed their holdings. But they still hold around 40% of Taiwan shares and they have been able to maintain that level for quite some time up to now," he said on Thursday.

"We have talked to foreign investors, including from countries such as Japan and Singapore. For them, the tensions barely register as a concern," he said, citing Taiwan's regional neighbours who would be most sensitive to the repercussions of any conflict between Taiwan and China.

China, which claims Taiwan as its own territory despite the strong objections of the island's democratically elected government, staged war games around Taiwan last August, and repeated those drills in April of this year.

"Even with the regular sight of Chinese warplanes flying around, why have foreign investors not left the Taiwan market?" Lin said.

Investment in Taiwan is currently too attractive to be deterred by China, he added.

Foreign investors are attracted to Taiwan's highly developed supply chain, led by the world's top chipmaker TSMC, a supply chain that plays an essential role in the currently booming AI industry, Lin said.

"Taiwan's supply chain is very strong. All these companies (in the supply chain), including Foxconn and Quanta Computer, have the capability to make quick adjustments in the face of geopolitical risks."

Next month, Lin and the island's chief securities regulator will lead a delegation to New York and Boston, seeking to establish direct links with 16 financial institutions, including the Depository Trust & Clearing Company，stock exchanges, pension funds, and fund management firms, in efforts to draw more investment in Taiwan stocks, he said.

"The more connected Taiwan is with international capital, the more secure Taiwan will be."

(This story has been refiled to add the dropped word 'Taiwan' in the headline)