Panama has switched its diplomatic relations from Taiwan to China, signaling Beijing’s economic muscle is forcing the dwindling number of countries who align with Taipei to comply to its will.

Only 20 countries – including the Vatican – continue to recognise Taiwan diplomatically, a stance which riles Beijing which promotes a ‘one China’ policy.

A statement from both countries issued on Tuesday said: "In light of the interests and wishes of both peoples, the Republic of Panama and People's Republic of China have decided to grant each other, from the date of this document's signing, mutual recognition, establishment of diplomatic ties at the ambassadorial level.”

Panama had previously said that it holds only economic ties with Beijing, but diplomatic relations with Taipei.

However, it now "recognizes that there is only one China in the world" and that Taiwan is part of Chinese territory.