Ooooh, the Chinese leaders were just bouncing in their Mao shirts over that. Beijing's retort is that there is only one China and that Pres. Bush's remarks are mistaken. China hasn't been paying attention. Taiwan became independent in 1949, and its independence has been recognized by most of the rest of the world for decades.
China just needs to get over it.
Leave Taiwan alone. Do business with their free brothers on that island, and move along. By the way, don't be overly distracted by the diesel submarine issue. Whether the U.S. can or cannot build diesel subs for Taiwan doesn't matter nearly as much as the willingness of the U.S. to stand behind an ally. Even a small, overmatched ally that lives always within the shadow of an angry giant's sandals.