Ep. 379: Paul Cavey on East Asia's AI Tech Boom…

PodcastMacro Hive ConversationsPaul CaveyOct 9

Paul Cavey describes an East Asian growth cycle increasingly shaped by AI and semiconductors, with Taiwan’s export exposure and Korea’s price-led growth translating into wider economic effects. He highlights differing pressures across the region, from Taiwan’s rising wages and inflation risks to Japan’s weak consumption and China’s property and investment weakness. He also discusses implications for rates, currencies, and government bonds, including the possibility that Chinese government bonds could provide a safe haven in a global selloff.

AI Infrastructure Semiconductors Supply Chains China Inflation Interest Rates

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Key Takeaways

Cavey describes China’s technology and AI gains as a sectoral driver of profits, not evidence of a broad cyclical upturn; semiconductor exports were growing 100% year over year. That strength contrasts with property starts down 85% from their peak, weak auto retail sales, and fixed-asset investment data that he says are not corroborated by comparable credit or machinery-import dislocation.

Cavey says semiconductor and AI supply-chain activity is a macroeconomic force in Taiwan and South Korea, but the exposure and growth mix differ: related products account for roughly 60% to 70% of Taiwan’s exports, while semiconductors are around 20% or more of Korea’s exports. He characterizes Taiwan’s growth as volume-led and Korea’s as price-led, with Korean memory prices up 200% year over year and supporting a positive terms-of-trade shock.

Cavey sees signs of rising domestic pressure in Taiwan: policy rates and 10-year yields were around 2% against inflation slightly above 2%, private-credit growth was strong, unemployment was at a 25-year low, and wage growth was near a 25-year high. He says inflation could keep rising if AI activity continues, particularly with negative real rates, while noting there were no clear signs that inflation was out of control.

Cavey says Korea’s export-price gains are lifting nominal income growth by 25% to 30% year over year, even as real growth is about 4%; he attributes the gap to terms of trade, export prices, and net exports rather than inflation. He says yields would usually be expected to rise more if the shock persists, but the rate outlook also depends on won appreciation and the shock’s duration, with the Bank of Korea’s dot plot indicating one increase over the next six months.

TECHNOLOGY

China’s Tech Exports — Cavey says China is building a more self-reliant technology stack while expanding technology exports. Semiconductor exports are growing faster than imports and were up 100% year over year at the time of the discussion. Technology and AI drove the movement in aggregate profits over the past four years, though he characterizes AI’s impact as sectoral rather than a broad cyclical upturn.

“AI is most important in Korea in Taiwan in China, get my countries right, because it's paying out on the export side…”—

ECONOMY

China Money Supply — Cavey says China’s money-supply growth is no longer as important a cyclical indicator as it was for roughly 10 to 15 years.

“You remember when, you know, the money supply growth numbers out of China were like one of the big macro indicators that everybody would look at…”—

Broader Chip Growth — Cavey argues that semiconductor-related growth in Taiwan and Korea is a macroeconomic phenomenon that filters into the broader economy, though the drivers differ between the two countries.

“And I think in both Korea and Taiwan, but for different reasons, that's that wouldn't be my view…”—

Growth Mix — Cavey contrasts Taiwan’s volume-led growth with South Korea’s price-led growth. He says Korean nominal GDP growth could reach about 30% year over year in the third quarter, against real growth of about 4%. He attributes the gap to terms of trade, export prices, and net exports rather than inflation, and compares Korea’s price boom with the early-1970s oil-price shock.

“So that's one difference. And the other difference between Taiwan and Korea in particular is Taiwan, it's a volume story…”—

MARKETS

Currencies — Cavey says the Taiwan dollar is weak relative to Taiwan’s growth and productivity and has not appreciated toward the stronger end of its usual trading band, around 28 per U.S. dollar. The Korean won had appreciated in recent months but remained cheap by his assessment.

“And hasn't followed the yen. That's true. But in real effective terms relative to the growth and productivity and all of that, Like it's very weak…”—

Memory Prices — Cavey says Korean memory prices rose 200% year over year, offsetting pressure from higher import prices, including energy. He argues this created a positive rather than negative terms-of-trade shock for Korea.

“Like I mean, there might be a super cycle now, but it's there's not huge swings in prices, In Korea, there's a huge swing in prices in memory and again…”—

FORECASTS

China Bond Outlook — Cavey says that under current policy settings, he sees little reason to expect a major change in the direction of the Chinese government-bond market over the next 12 months. He says CGBs could serve as a safe haven if sovereign bonds sell off around the world.

“I mean they're probably too low relative to a bunch of things But you know, is there going to be a great change in the seat in the direction of…”—

MacroHive Markets And East Asia

The host introduces MacroHive Markets and guest Paul Cavey, then frames Taiwan, Korea, Japan, and China as increasingly important to global investors.

AI Supply Chains And Growth

Cavey says Taiwan benefits most through export volumes, Korea through semiconductor prices, China through a concentrated tech sector, and Japan through a manufacturing revival and stronger nominal revenues.

Taiwan Rates And Productivity

Cavey describes Taiwan’s surge as primarily a productivity shock, but questions the central bank’s claim that policy is tight while real rates remain negative and credit and wages accelerate.

Taiwan Dollar And Capital Flows

Despite strong growth and a huge current-account surplus, Taiwan’s currency remains range-bound and weak in real terms; Cavey says outflows continue and inflation pressures are rebuilding.

Asia Energy And Trade Shocks

Cavey sees limited immediate energy damage in Taiwan and Korea because subsidies cushion costs, while Korea’s exceptional semiconductor price gains offset imported energy inflation.

Korea’s Price-Led Boom

Korea’s terms-of-trade windfall is lifting nominal incomes and prompting rate hikes, but policy also depends on won appreciation and how durable the semiconductor cycle proves to be.

Japan Fiscal And Household Strains

Japan’s stronger nominal growth and tax receipts ease some fiscal concerns, but real pension cuts and weak household incomes help explain persistently soft consumption.

BOJ Rates And Yen Risks

Cavey expects cautious, gradual BOJ tightening as manufacturing and inflation improve, while a weak yen risks lifting inflation expectations despite the benefits it brings exporters.

China Property And Domestic Demand

China’s property downturn remains severe, with weak sales and falling starts; targeted support and government bond issuance can steady some indicators but do not signal a decisive policy shift.

China Tech And Export Competition

China’s semiconductor exports are growing faster than imports, but Cavey sees little evidence that official efforts to curb excessive competition have yet changed corporate behavior.

China Bonds And Currency

Cavey links yuan strength partly to easing deflationary pressure, while weak activity and high savings keep government-bond yields low and could leave Chinese bonds as a safe haven.