Excessive borrowing and circular transactions among global artificial intelligence companies could trigger financial instability that spreads to South Korean chipmakers including Samsung Electronics (005930.KS) and SK hynix (000660.KS), according to a new assessment. A pullback in AI investment could reduce demand for high-bandwidth memory and weigh on exports.
The Bank of Korea released the findings on the 27th in a report titled "Key Features and Risk Assessment of Funding in the AI Industry." The report identified South Korea as the biggest beneficiary of the AI boom and said shocks to the real economy and financial markets originating from AI "could be transmitted with greater intensity than in the past." If AI companies are slow to turn a profit, data center construction and purchases of graphics processing units would decline, hurting sales of high-value memory chips such as HBM by Korean manufacturers.
Borrowing by U.S. big tech firms is rising rapidly. Corporate bond issuance by five companies — Alphabet, Microsoft, Amazon, Meta and Oracle — reached about $230 billion in the first nine months of this year, more than double the full-year total for last year.
The complex funding structures used by financially fragile AI startups are another source of concern. So-called neoclouds, startups that lease out GPU capacity, are taking out loans secured by their equipment or issuing convertible bonds. Some AI companies are also using off-balance-sheet financing through special purpose vehicles or joint ventures, making it harder to gauge their actual debt levels and who ultimately bears the risk, according to the report.
Circular transactions between companies risk inflating AI demand beyond actual levels. In one pattern, an AI developer uses money invested by a big tech firm to buy cloud services from that same firm. Data from the Bank for International Settlements cited by the central bank estimated that circular financing accounts for more than 50% of flows among AI developers, cloud providers and chipmakers. In a separate analysis, Bank of Korea researchers found that circular deals made up 47% of Oracle's cloud services backlog and 41% of Microsoft's.
The concern is that distress in the AI industry could spill beyond chip exports into financial markets. If financial institutions take losses on corporate bond investments or loans, they may curtail credit to other companies as well. The complex web of funding relationships between companies could magnify the shock in that process.
Bank of Korea researchers said AI-driven financial instability is unlikely to materialize in the near term, citing the solid financial positions of major big tech firms and the fact that AI investment is grounded in real demand. Still, they said vulnerabilities "are assessed to be gradually accumulating amid rising long-term interest rates," stressing the need for continued monitoring of potential risks.
