The head of Taiwan's central bank calls for carefulness regarding leverage as the surge in AI stocks continues to gain momentum.

      Taiwan’s leading central banker has advised investors to avoid excessive borrowing in pursuit of the island’s booming stock market, which is being driven by global demand for AI hardware supplied by Taiwanese companies. Yang Chin-long, the governor of the Central Bank of the Republic of China (Taiwan), issued this warning on Thursday during a report to lawmakers, as discussions on an overheating AI market intensify in Taipei.

      “I can only say that we hope investors do not use excessive leverage in their investments,” Yang remarked to the legislature’s Finance Committee, stressing that the overall market is based on solid fundamentals. His remarks were more restrained compared to the bubble concerns present in global markets. Instead of labeling the AI situation as a bubble, Yang downplayed the notion that the increase in retail borrowing posed any immediate danger, asserting that it did not indicate systemic risk.

      Taipei has experienced a remarkable growth phase, with the benchmark Taiex index rising approximately 60% since the beginning of the year, reaching a record 46,459 points on June 3 before entering a correction. This increase corresponds with the fortunes of companies central to the AI supply chain, particularly chipmaker TSMC, which has a significant impact on the index. As demand for AI accelerators has surged, many retail investors have been tempted to borrow against their homes and other assets to invest.

      Lawmakers have raised concerns about what they refer to as the “four loans” issue, identifying mortgages, margin financing, personal loans, and auto loans being redirected into stocks. Yang acknowledged the rapid influx of funds but reassured that regulators are monitoring the situation closely and have not detected any broad threats to financial stability.

      He also made a nuanced distinction regarding the central bank’s financial stability report, which highlighted fast-rising financing linked to sectors related to AI, indicating that those references stemmed from International Monetary Fund analysis rather than an independent evaluation by the bank itself.

      This distinction is important. Yang's primary caution was not about a potential abrupt reevaluation of AI stocks, which markets worry about, but rather a specific concern regarding how excessive leverage could transform a routine market correction into forced selling, resulting in losses that households might struggle to absorb.

      Taiwan occupies a unique position in the AI discourse, benefiting significantly from the boom with its economy bolstered by high demand for chips, while also being vulnerable if market sentiment shifts. The implications are significant, affecting the national economy rather than just individual investors.

      Taiwan’s export-oriented economy has been performing exceptionally well, with forecasts predicting some of the fastest growth in years due to chip exports dominated by a few companies. This creates a tension in the industry, where some argue there is no bubble while skeptics point to overvalued stocks.

      For a central bank that plays a critical role in one of the world’s most AI-sensitive economies, the situation is more complex than offering a straightforward judgment on the technology. Other central bankers have issued more pointed warnings, suggesting that inflated AI valuations could lead to a wider financial crisis, whereas Yang’s stance was more composed, focusing on investor behavior rather than the technology itself.

      Regulators have various tools at their disposal if market exuberance escalates, including increasing margin requirements and tightening credit, though Yang did not indicate that any such measures were imminent. He preferred to encourage investors toward caution rather than enforcing restrictive measures.

      For the time being, the governor advocates for restraint rather than panic. He refrained from suggesting new limitations on margin lending, delivering a straightforward message to investors: enjoy the rally, but don’t risk everything on it.