Benefiting from the continued rise in demand for artificial intelligence (AI) and other emerging technology applications, Taiwan’s tech-driven exports rose significantly, and private investment further increased this year, prompting the central bank to revise upward its economic growth forecasts last week. While deciding to keep its policy rates unchanged for the seventh consecutive quarter since its last rate hikes in March last year, the central bank raised its GDP growth estimates to 7.31 percent for this year — the highest in 15 years — and to 3.67 percent for next year — the most optimistic forecast among domestic institutions, from its previous projections of 4.55 percent and 2.68 percent respectively.
Previously, the market believed that with Taiwan’s exports repeatedly hitting record highs and exporters holding large amounts of US dollars, the New Taiwan dollar should appreciate against the greenback. However, the NT dollar exchange rate has instead depreciated since July. Even with the recent rate cuts by the US Federal Reserve and thereby the narrowing interest rate differentials between Taiwan and the US, funds have not returned home, but have flowed out. The main reason is that the market has doubts about the prospects of AI, which caused the stock market to enter a correction mode and led to adjustments in capital flows.
At its quarterly board meeting on Thursday last week, the central bank pointed out that the NT dollar’s volatility, driven by massive flows of short-term capital and hedging by life insurers, would harm the nation’s economic and financial stability, and reiterated that it would step in to maintain an orderly market if necessary.
In addition, the central bank said it has paid attention to the market’s recent concerns about an AI bubble after AI stocks corrected meaningfully from their highs, as the market began reassessing whether AI firms’ massive capital expenditures had sufficient end-demand support.
This round of the AI boom, driven by a series of massive partnerships and financing deals involving OpenAI, Oracle Corp, Nvidia Corp and several other companies, has rapidly fueled market expectations that computing power could never be enough, and investments in servers and data centers should come sooner rather than later, greatly boosting valuations of leading AI stocks.
However, slowly but steadily, there was growing worry among investors that the market was heavily reliant on the performance of a handful of tech giants, and that the demand for AI could be tailing off, so the massive investments might not pay off as anticipated. Simultaneously, what has been unsettling was a wave of increasingly complex circular deals within the AI industry, where companies said to use supplier financing, equity investments to exchange for purchase commitments, or resort to special purpose vehicles to complete deals while hiding debt off their balance sheets. These mechanisms would make business perils harder to discern, and they could further amplify risks to the financial system as a whole, once the AI industry’s path to monetization falls short of expectations in the future.
The big question is whether the AI industry would face a bubble bursting in the near term, similar to the dotcom bubble in 2000. While the central bank last week did not directly answer this question, it suggested such a worry did not come out of nowhere and would not be gone suddenly, as several potential risks still need to be closely monitored in the future. Indeed, the latest Bank of America Merrill Lynch global fund managers survey showed that the AI bubble bursting topped the biggest tail risks for the market, with 38 percent of those polled thinking so this month, versus 45 percent last month.
A more accurate interpretation of the market mood is that it highlights the true vulnerability of this AI boom — advancements in AI technology do demonstrate long-term development potential, but current end-user applications and commercialization models are not yet fully established. That explains why the market remains concerned about whether the massive capital expenditures of cloud service providers and other AI-focused firms have become imbalanced. However, as the central bank pointed out, the process of transforming new technologies into substantial productivity inevitably involves a transitional period of adjustment and adaptation, which is an unavoidable path for industrial innovation and upgrading.
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