Taiwan's Central Bank Governor Yang Chin-long has issued a stern warning against the practice of borrowing heavily to invest in the red-hot stock market, which has seen an unprecedented 100% rally in the past year. This caution comes as speculation, fueled by the Artificial Intelligence (AI) boom, pushes the Taiwanese market to become the world's fifth largest, surpassing the UK, Canada, and India. The market's rapid ascent is largely attributed to Taiwan's dominance in producing advanced chips, with companies like Taiwan Semiconductor Manufacturing Co. collectively making 90% of the world's most advanced chips, crucial for AI data centers.
The surge in stock market participation includes teenagers opening brokerage accounts and trading volumes causing websites to crash. A significant concern for authorities is the record-high margin lending, where investors borrow at low-interest rates to purchase stocks. Margin debt has swelled by 160% over the past 12 months, exceeding the 50% increase observed before the 2000 dot-com crash and the 94% rise in South Korea. This borrowing spree is so widespread that it even disrupted a central bank debt auction on June 3, failing to attract enough buyers, and investor defaults from stock trades more than doubled in June to over NT$2 billion ($63.3 million), the highest since 2019.
Despite the market's continued rise, worries are growing among economists and regulators. Dachrahn Wu, a professor at National Central University, described the market as "clearly overheated," fearing "devastating losses" for young investors in the event of a sudden, deep sell-off. The Financial Supervisory Commission's Securities and Futures Bureau claims that none of the 34 brokerages engaging in leverage financing have breached regulatory limits as of May, and defaults remain below 0.002% of all transactions. However, industry insiders report brokers increasing margin loan rates by 0.2 percentage points and unrestricted loan rates by as much as one percentage point, with some firms stress-testing their loan portfolios against a 20% to 30% market plunge. The potential for a market correction could lead to broader economic repercussions, including pressure on brokerages, reduced household consumption, and a hit to exports, according to Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis SA.
