Bill Roggio serves up an excellent analysis of the current situation, making use of a Naval War College Review article by Justin Bernier and Stuart Gold. It is a much more updated review than the article by Piers Wood and Charles Ferguson, and thus accounts for somewhat more recent developments.
I completely agree with Bill's analysis that no invasion is likely prior to the 2008 Olympics. China is the home of the concept of "saving face", and it is not likely, even remotely, to allow its international image to be tarnished by such a flare up. Also, despite its taste for political grandstanding, and notwithstanding its recent history, China is also the home of Sun Tzu, among whose many dicta was a recommendation to act weak when strong, and act strong when weak. That is to say, China prefers to operate in sleeper mode. Its actual military capabilities buildup will likely be shrouded, and far more difficult for American intelligence to penetrate.
I will note a few factors that nudge China in the direction of a post-Olympic invasion, however.
First and foremost, the re-annexation of Taiwan is and has always been a matter of national pride. Nationalism is basically triablism write large, and has been the cause for many bloody conflicts over the years (religion being the only excuse that has shed more blood). Nationalist irredentist sentiment will, sooner or later, drive the People's Republic to assert its claim to Formosa.
Running a close second, China is a rising economic force, meaning that its energy demands will grow rapidly over the next few decades. In order to secure access to energy, primarily in the form of petroleum (which also serves as the foundation for plastic goods, which will remain a mainstay of Chinese exports for at least another decade). In terms of shipping lanes, China will probably be content to let the United States police the sea lanes, and derive its access in this way. However, Chinese are notoriously obsessive compulsive (in addition to passive aggressive), so it will want to carve out its own access. Most likely, it will attempt to do so with a pipeline through the Central Asian states, siphoning off from Iran.
Lastly, China is in a very similar situation today to where Japan was at the beginning of the 20th Century. It is a modernizing society that has had to deal with national shame at being eclipsed in the sunlight, undergoing rapid change, and experiencing a rapid rise in demand for resources. Japan's answer to that, eventually, was Asian Imperialism, beginning with Korea, and then Taiwan, and then the "Greater East Asia Co-Prosperity Sphere". In the end, Japanese fear of American intervention led to the bombing of Pearl Harbor.
Chances are that Chinese planners will have remembered the lesson learned by Japan sixty years ago, but in a nation with a growing gender imbalance, idle military, and large floating population of undocumented, unemployed young men, there is a very real danger that some young colonel will have forgotten his history. The question, then, isn't whether China can invade Taiwan in the near future; but rather, when it can, and whether it succumbs to the temptation.
[Cross-posted at Between Worlds and Naruwan Formosa]