The head of Taiwan's central bank emphasizes the need for prudence regarding leverage as the AI stock surge intensifies.

      Taiwan's leading central banker has advised investors to avoid excessive borrowing to participate in the island's rising 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 while addressing lawmakers amid ongoing discussions about a potentially overheating AI market in Taipei. "We hope investors refrain from employing overly aggressive leverage in their investments," Yang advised the legislature's Finance Committee, emphasizing that the market is grounded in solid fundamentals.

      His remarks were more cautious than the speculation about a bubble circulating in global markets. Instead of outright labeling the AI market as a bubble, Yang downplayed the notion that increasing retail borrowing posed any immediate danger, stating that the situation did not indicate systemic risk.

      The backdrop of this caution is a remarkable upswing in Taipei, where the benchmark Taiex index has surged approximately 60% since the beginning of the year, reaching a record of 46,459 points on June 3 before entering a correction phase. This rise reflects the fortunes of companies central to the AI supply chain, particularly chipmaker TSMC, which has a significant influence on the index. As demand for AI accelerators has increased, retail investors have been tempted to borrow against their homes and other assets to invest.

      Lawmakers have raised concerns about what they term the "four loans" issue, referring to the practice of funneling mortgages, margin financing, personal credit loans, and car loans into the stock market. Yang acknowledged the rapid influx of funds but indicated that regulators are monitoring the situation closely and observed no signs of a widespread threat to financial stability.

      He also made a careful distinction regarding the central bank's financial-stability report, which highlighted the swift growth of financing related to AI sectors. Yang clarified that these references were based on analysis from the International Monetary Fund, rather than the bank’s independent evaluation.

      This distinction is significant. The overarching risk that markets are worried about—the abrupt adjustment of AI stock prices—is not what Yang was primarily cautioning against. His focus was more specific: that excessive leverage could transform a normal market correction into forced selling, leading to losses that households cannot sustain.

      Taiwan occupies a unique position in the AI discussion. Its economy is among the primary beneficiaries of the boom, with exports and growth significantly bolstered by high demand for chips, yet this concentration renders it vulnerable should sentiment shift.

      The implications of this situation are national rather than just personal. Taiwan's export-centric economy has been performing exceptionally well, with predictions suggesting some of the fastest growth in years driven by chip shipments from a select few companies. This creates tension within the industry, with views ranging from those who deny the existence of a bubble to skeptics who point to inflated valuations.

      For a central bank whose currency supports one of the world’s most AI-dependent economies, the balancing act is more nuanced than issuing a straightforward verdict on the technology. Other central bankers have issued starker warnings, suggesting that inflated AI valuations could trigger a broader financial crisis.

      In contrast, Yang's message remained more composed, focusing on investor behavior rather than the technology itself. Regulators have tools at their disposal to curb excesses, such as increasing margin requirements and tightening credit, although Yang did not indicate that any immediate actions were planned. Consistent with the bank's cautious strategy, he preferred to advise investors against risky behavior rather than implementing restrictive measures.

      For the time being, the governor’s recommendation is one of moderation rather than panic. He refrained from suggesting new restrictions on margin lending, conveying a straightforward message to investors: enjoy the rally if you wish, but do not wager everything on it.