Asia among most vulnerable to AI correction, report shows

The Asia-Pacific region, a hub for artificial intelligence development, is among the most vulnerable to a potential AI correction, according to a recent report. Southeast Asia, China, Japan, and South Korea are particularly exposed, as they are at the core of global AI supply chains and increasingly intertwined with AI-related financial markets, notes the Asean+3 Macroeconomic Research Office.

The report warns that a disorderly correction could have far-reaching consequences, including lower technology exports, portfolio losses, capital outflows, and weaker investor confidence.

The region's dependence on AI-related exports has helped it withstand external shocks, such as high energy prices and US tariffs. However, a sudden slowdown in AI demand could lead to a contraction in capital spending, which would negatively impact export revenues, investments, and overall economic growth. In addition, some regional equity markets are heavily concentrated on AI, making them particularly susceptible to sharp price corrections.

The report also highlights the potential impact of opaque private credit markets and circular financing deals, which could exacerbate instability in the AI sector. As AI investments grow and capital-intensive data center projects become more common, higher levels of leverage could amplify the effects of a market correction. Central banks worldwide, including the Bank of England and the Monetary Authority of Singapore, have expressed growing concerns about the sustainability of massive AI investments, given the technology's rapid advancement and the emergence of new challenges, such as stiff competition, higher borrowing costs, and security concerns.