Circular AI Boom Goes Global as Asia Windfall Funds Hyperscalers

u262{fm]z3l94fmk42tezjjz_media_dl_2.png Bloomberg, company filings

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(Bloomberg) — The windfall earned by Asian chip makers is coursing through the world economy, mirroring on a global scale the circular flow of money within the AI ecosystem.

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The artificial intelligence boom is generating unprecedented amounts of cash for the likes of South Korea and Taiwan, which in turn is creating a narrower version of the Asian savings glut that kept US borrowing costs low through the late 1990s and early 2000s. 

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That’s according to a new note from Oxford Economics examining how technology-producing economies are converting export earnings into external surpluses faster than domestic investment can absorb them. 

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Some of that capital is finding its way back into dollar assets, Head of Asia Economics Louise Loo wrote in the note. Such investments indirectly support the financial conditions that help fund capital spending by big tech companies known as hyperscalers, a group that includes Alphabet Inc., Meta Platforms Inc., Microsoft Corp. and Amazon.com. 

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“This framework of Asian savings recycled into US assets echoes Bernanke’s savings-glut framework two decades ago,” Loo wrote in the note, referencing a theory popularized by former US Federal Reserve Chair Ben Bernanke. But “today’s AI-linked version of Asian surplus recycling is narrower and more concentrated.”

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For much of North Asia, surging chip exports have overwhelmed the drag from higher energy prices stemming from the Iran war. That’s fueling the fastest economic growth in decades in Taiwan and boosting Japan’s and South Korea’s tech-heavy economies, too. 

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It’s also creating a windfall for companies including Taiwan Semiconductor Manufacturing Co. — the main chipmaker to Nvidia Corp. and Apple Inc. — and Samsung Electronics Co., which saw a 48-fold jump in profits for its semiconductor arm in the first quarter. 

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At the macro level, the boom is generating massive imbalances. 

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Data Wednesday showed Taiwan’s current account surplus jumped 111% from a year earlier to $62.5 billion in the first quarter. And there’s no sign of chip demand slowing just yet, with export figures Thursday from South Korea for the first 20 days of May jumping nearly 53% from a year earlier when adjusted for working day differences. 

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The excess earnings amassed by Asia’s biggest economies now far exceed the surpluses accumulated by Gulf Arab economies, which were once a pillar of a petrodollar system that relies on pricing crude exports in the US currency. “De-dollarization is more likely to be determined by how Northeast Asia deals with its surpluses than by reduced petrodollar recycling in the Middle East,” Gavekal Research said in a note.

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But the concentration of surplus formation in a handful of upstream Asian tech economies and final demand among US hyperscalers also creates potential vulnerabilities.