AI “circular deals” and Big Tech credit swaps: is the next systemic risk hiding in plain sight?

AI titans’ “circular deals” are increasingly being compared to the “daisy chains” that fueled the 1980s US savings-and-loan crisis, where interconnected transactions obscured risk and helped inflate asset values before roughly a third of thrift banks failed. The SCMP analysis frames today’s AI funding and corporate cross-holdings as potentially similar in structure, even if the actors and instruments differ. In parallel, Tencent’s move to swap Bilibili equity for debt is presented as a concrete example of how China’s Big Tech is rebalancing portfolio risk while still financing expensive AI-related initiatives. The article notes that the shift is being executed through Bilibili’s proposed US$700 million convertible instrument, effectively changing Tencent’s exposure from shareholder upside to creditor downside protection. Strategically, these stories point to a geopolitical-finance feedback loop: AI investment needs capital at scale, but capital is increasingly routed through balance-sheet engineering rather than only through fresh external funding. In the US, the “daisy chain” analogy underscores systemic-risk concerns that regulators and investors typically associate with opaque intercompany financing, valuation support, and correlated counterparty exposures. In China, Tencent’s creditor pivot signals that Big Tech is managing risk amid tighter financial conditions and heightened scrutiny of capital allocation, while still sustaining the AI buildout that underpins competitive positioning. The likely winners are firms that can convert equity exposure into seniority or contractual claims, while the losers are counterparties that rely on continuous refinancing or whose valuations are most sensitive to liquidity shocks. Market and economic implications could show up first in credit-sensitive corners of tech finance rather than in headline equity indices. Bilibili’s proposed US$700 million convertible structure can influence demand for convertibles, corporate credit spreads, and volatility in Chinese tech risk premia, especially if investors interpret the equity-to-debt shift as a signal of caution. Nvidia’s CEO argument that customer-lending-like structures “unlock investment” highlights a broader pattern where financing arms can support demand and capex cycles, but critics warn of dotcom-era-style leverage and mispricing. If circular deal networks expand, investors may price higher funding costs for AI-adjacent firms, potentially pressuring high-duration assets, convertible arbitrage strategies, and leveraged balance sheets tied to AI capex. What to watch next is whether these transactions remain isolated portfolio adjustments or evolve into tighter, more interdependent funding loops that increase correlated default risk. Key indicators include disclosures of intercompany exposures, changes in the seniority and covenants of AI-linked credit instruments, and any widening in credit spreads for Chinese tech convertibles and structured products. For the US angle, monitoring regulatory commentary and bank/fintech risk assessments for “daisy chain” analogies can help gauge whether policymakers see a systemic pattern. Trigger points would be stress in convertible markets, sudden refinancing needs among AI-adjacent firms, or evidence that valuation support mechanisms are becoming more reliant on circular counterparty flows rather than underlying cash generation.

Geopolitical Implications

• 01

  AI competition is increasingly financed through balance-sheet engineering, which can become a cross-border financial vulnerability between US and China.

• 02

  Creditor pivots by Chinese Big Tech may reflect tighter risk tolerance and regulatory/financial constraints, influencing how AI supply chains are funded.

• 03

  If “daisy chain” dynamics spread, policymakers in the US may intensify scrutiny of systemic-risk channels in tech finance, affecting capital flows.

Key Signals

• —Details on Bilibili’s convertible terms (seniority, covenants, conversion triggers) and investor demand
• —Credit spread movement in Chinese tech convertibles and structured products
• —Regulatory or central-bank commentary referencing systemic-risk patterns in corporate/AI financing
• —Disclosure trends showing increasing intercompany exposures among AI-linked firms