While China's economic growth slows, trademark-backed loans buck the trend
Chinese businesses leveraged trademark rights to receive loans totalling Rmb65 billion in 2016, more than double the sums lent in 2015. Significantly, the figure dwarfs equivalent lending against patents, and comes at a time of slowing economic growth in the country.
Last year we reported that trademark-backed lending had slowed in the country, mirroring a slump in economic growth. Official statistics from the country’s State IP Office (SIPO) revealed that, in 2014, Chinese businesses secured Rmb2.625 billion (approximately $390 million) in credit backed by copyrights and Rmb48.9 billion ($7.2 billion) against patents. Leading the way, though, were loans based on trademarks as collateral with Chinese enterprises receiving loans totalling Rmb51.9 billion ($7.71 billion) in 2014. In 2015, a year in which the Chinese economy experienced stock market turmoil and its slowest growth in decades, lending slumped. Official SAIC statistics reported that, while it recorded 970 trademark rights pledges, involving 9,463 marks, during 2015 (a 40% year-on-year increase), these secured finance to the tune of Rmb28.85 billion – less than two-thirds the value reported for the previous year. The drop prompted us to speculate that the party could be over as far as trademark pledges for credit are concerned. It appears, though, that we may have been a little hasty to make that assertion.
In this year’s China IP Development Situation Evaluation Report, which seeks to measure the health of China’s intellectual property environment, a significant bounceback was evident. The report scrutinises four aspects of the IP system – IP creation, IP protection, the development environment (ie, the availability and sophistication of service provision) and IP utilisation, with the latter focusing on the monetisation of IP through licensing, sales, collateralisation and securitisation.
Presenting the findings, the National Intellectual Property Office Intellectual Property Development Research Center notes that, while the growth of intellectual property use has slowed, rights creation and market development have been increasing, including a spike in the number of IP agencies and attorneys. However, it is the IP utilisation analysis that catches the eye, trademark pledge financing hitting Rmb65 billion in 2016 – more than double the amount experienced in 2015, and even surpassing 2014’s lending.
The trademark lending slump in 2015 came in a year in which the Chinese economy recorded 6.9% growth – it’s lowest in 25 years. However, according to official data, in 2016 this slowed further, with the economy’s 6.7% growth its slowest since 1990. China IP News reports that patent pledges stood at RMB43.6 billion in 2016, so remained below the equivalent 2014 figure. Clearly, trademark-backed lending is bucking the trend. So what accounts for this?
The Chinese government is clearly focused on building strong brands, and this year China’s state council designated May 10 as ‘Chinese Brands Day’, a new annual focus on publicising brands owned independently by Chinese companies and raising brand recognition. In terms of IP financing, brand-backed lending is not yet mainstream but in many respects China has been leading the way, being instrumental in driving forward the standard-setting process for brand valuation (speaking at the 2015 Managing the Trademark Asset Lifecycle event in New York, David Haigh, CEO of Brand Finance, noted that in China it is already a legal requirement for the largest companies to conduct a valuation each year).
Clearly, brand matters for the government – or more specifically the value that can be generated up through a focus on brand building. This has led to domestic brands being in a position to leverage their value in very tangible ways. For instance, on February 21 2014, Quanlin Paper, a company based in the Chinese province of Shandong, formally recorded at SIPO that it had secured Rmb7.9 billion (approximately $1.3 billion) against a portfolio of 110 patent and 34 trademark rights (with China Development Bank leading the consortium which made the money available). In the recent Brand Finance Global 500 Chinese tech brands – a number of which remain relatively unknown outside the domestic market – are soaring in value. Brand Finance also reports that Chinese banks have also been rapidly outpacing their European and North American competitors (with ICBC, China’s most valuable brand, overtaking Wells Fargo to become the world’s most valuable bank brand).
As we noted in 2014, there is little detail about how the SIPO lending scheme functions, or about how the Quanlin Paper deal was put together specifically. Therefore, absent the metrics used to calculate the value residing in trademarks and related rights, the question of whether the underlying IP is truly worth the sums received remains. However, $7.71 billion is not small change and the Chinese focus on brand building is clearly paying off for many domestic organisations. Whether its efforts lead to a wider international inclination to lend and borrow against brands remains to be seen. For now, though, it does illustrate the powerful financial payback that effective brand building can offer.