China’s multi-billion dollar IP financing market may not be all it seems 11 May 14
Under the radar, an IP financing revolution may be taking place. Recently, news emerged from China of what looks like one of the world’s biggest-ever specifically IP-based loans. On February 21 2014, Quanlin Paper, a company based in the Chinese province of Shandong, formally recorded at the State Intellectual Property Office (SIPO) that it had secured Rmb7.9 billion (approximately $1.3 billion) against a portfolio of 110 patent and 34 trademark rights. China Development Bank led the consortium which made the money available.
The amount that Quanlin Paper received is among the largest known sums that an IP portfolio has directly generated in any kind of transaction. Most of the company’s IP rights are limited to China; thus, on the face of it, this deal looks like a huge vote of confidence in the country’s IP system, and in the value of the IP that is created and protected there. The IP also relates to a business sector that until now has not attracted a huge amount of transactional interest – at least publicly.
News of the Quanlin Paper loan emerged just after SIPO had posted a story on its official website from China IP News which revealed that Chinese companies obtained over Rmb25.4 billion ($4 billion) of credit guaranteed on patent rights in 2013. This sum represented year-on-year growth of 80% and means that credit totalling Rmb63.8 billion ($10.38 billion) has been secured against patents by Chinese entities since SIPO launched what it describes as a “pilot IPR pledge financing programme” in 2008.
The figures reported by SIPO and the Quanlin Paper loan could indicate that China has reached a degree of sophistication in its understanding of IP valuation that has enabled it to establish a system of world-leading IP financings. Unfortunately, there is no detail about how the SIPO scheme functions in general, or about how the Quanlin Paper deal was put together specifically, so it is impossible to tell. However, there are a number of reasons to believe that, in reality, China may not be leading a revolution.
People have been wrestling with lending against IP for a number of years, and they have struggled to come up with solutions that would allow trademarks, patents and other IP assets to be used as collateral in any meaningful sense. Recently, for example, the UK IP Office produced Banking on IP? The role of intellectual property and intangible assets in facilitating business finance, an in-depth examination of the issues and challenges posed by such financing; on its opening page the report stated: “Company cash flow, perhaps the chief consideration in debt finance, is often closely connected to company IP assets. Despite this, and good evidence to show that high growth, IP-rich businesses are more resilient and perform better than others over time, the IP and intangibles which equity investors value highly are rarely considered in mainstream lending practice. This is unsurprising: balance sheets do not represent their value, and current regulations actively work against consideration of IP as an asset class …”
Although Banking on IP does suggest ways in which current challenges might be overcome, what it makes absolutely clear is that it is complicated and time consuming for non-experts to get a feel for IP and how it might be used effectively were it necessary to take rights on in the event of a debtor defaulting. And although it was produced in and mainly focuses on the United Kingdom, the issues that the report deals with apply in most countries.
China’s IP system is relatively young, with the first trademark law being adopted as recently as 1982; while the Chinese themselves have made clear on a number of occasions that the domestic IP talent pool is pretty shallow – to the extent that they have created significant incentives for foreign IP strategists and consultancies to set themselves up in the country. Given that, it is hard to see how Chinese financial institutions are in a position to make the detailed assessments of IP assets that, from a western perspective, would be necessary before money might be released.
In the normal course of events, an IP-backed loan would be agreed only when a lender believed it would be able to recoup its debt from selling on or licensing the rights that it would inherit in the event of a default. Thus, there would have to be a high level of confidence in the strength, integrity and enforceability of the IP in question. Even then, it is likely that a substantial discount to the true value would be applied.
Because little detail is known about the Quanlin Paper IP loan, it is not possible to ascertain what degree of due diligence was carried out by the China Development Bank consortium. But in a country where the IP system itself is only relatively young, counterfeiting and piracy are frequent, enforcement remains a major challenge, and the government itself has recognised the lack of IP expertise that exists, it is only right to wonder about the metrics which were applied and the checks that were carried out.
Something of which there is no doubt, however, is that the Chinese government is very focused on raising IP awareness and getting domestic companies to understand the potential that IP can release. One obvious way of doing this is to encourage financing schemes; and given the leverage and even direct control that the government has over banks and other financial institutions in China, that might be relatively simple to do. Throw in targets, create incentives, set region against region and you might begin to build something. After all, this is what has driven a great deal of the explosion in patenting in the country over recent years.
That less than 150 mainly Chinese patents and trademarks can have secured Quanlin Paper so much money is extraordinary. If China Development Bank and other financial institutions in the country have cracked a way of evaluating intellectual property that gives them the confidence to release such sums, it is to be hoped that at some time in the near future they will share their insights.
More realistic, however, is the notion that actually the intellectual property concerned probably is not worth close to the amount loaned, and that if Quanlin Paper does default, China Development Bank will struggle to recoup even a fraction of that Rmb7.9 billion from the rights concerned. But as the Chinese government seeks to inculcate a culture of IP value creation, that may not be too much of an issue: the state-owned China Development Bank can probably afford to take the hit; and, in any case, a well-established company such as Quanlin Paper is unlikely to fail to pay back what it owes.
In the great scheme of things, whatever happens with this loan and similar ones that have been made over recent years, should the availability of IP financing lead to an increase in strategic IP awareness among Chinese businesses, a fundamental aim of the country’s government will have been achieved. This would be especially so if a great deal of practice ends up making perfect for China’s financial institutions so that, from their bitter early experiences, they develop methods that do lead to the emergence of a genuinely world-class system of IP financing.
Register for more free content
- Read more World Trademark Review blogs and articles
- Receive the editor's weekly review by email