China’s IP finance push reaches new heights but hits patent transaction data stumbling block

There is no doubt that the Chinese government’s financial institutions are willing to support companies financially based on their IP. The CNIPA revealed recently that an event in the city of Xiangyang helped companies in the renewable energy industry obtain 96.8 million Chinese yuan (US$13 million) in loans from banks on the back of their IP, for example (December 2, 2024 CNIPA press release).

GEN Law partner Dong Ning, notes that the growth aligns with the annual increase in China’s total social financing scale, which is a direct result of economic expansion and an accommodative monetary policy.

As part of that, Mr Ning says, state-owned banks are being encouraged to provide more loans to these sectors – and IP financing is a favorable option for them.

According to Terry Lu at Lusheng Law Firm, there are a number of milestones that have led to this:

• 2010: The CNIPA, Ministry of Finance and China Banking Regulatory Commission (CBRC) jointly published a notice to promote IP financing and explore a new inventive IP financing service to help start-ups get loans from banks using IP assets as the pledged properties.
• 2016: The CNIPA launched pilot projects on IP financing in cities including Shenzhen, Guangzhou, Beijing, Nanjing etc.
• 2018: The Shanghai Stock Exchange and Shenzhen Stock Exchange piloted IP securitization and each approved a securitization product, supplying 1.2 billion Chinese yuan (US$165 million) between them.
• 2019: The China Banking and Insurance Regulatory Commission (CBRC) issued a working plan to further strengthen the IP financing service system, requiring commercial banks to establish specialized IP financing and risk management systems, and cooperate with local IP offices to provide services to companies that have IP assets and need financing.
• 2021: The CNIPA, CBRC and the State Development and Reform Commission published a 2021-2023 action plan to provide IP pledge financing to companies in hundreds of industrial parks across China.

As China’s economy transitions from traditional manufacturing to one that is high-tech and innovation-driven, the value of IP has become increasingly prominent, says Xinming Ma, General Manager of Chinese valuation company Beijing Zhongjinhao Assets Appraisal Co. And for enterprises with a large number of patents, IP financing can be leveraged to obtain the financial support they need to further expand their business. This is also linked, according to Mr. Ma, to the way in which the “core competitiveness of enterprises is often reflected in the patents and technical secrets they hold”. “As market recognition of the value of IP increases, so does demand, prompting more financial institutions to participate in IP financing,” he says.

“Additionally, the application of fintech brings more possibilities for IP financing, such as the use of big data analysis to improve the accuracy of evaluation, and the use of blockchain technology to ensure the security of the transfer of rights,” Mr. Ma adds.

Growth and limitations

To further grow its IP financing market, Mr. Lu says China needs to do two things:

“More investment in R&D in IP-intensive industries like telecoms and pharmaceuticals so that more high-quality IP can be generated. And cultivate more professionals and third-party institutes to do IP evaluations. Currently, not many organizations have the capability to do patent evaluations professionally and reliably.”

As part of its efforts, the Chinese government and CBC have been compiling data from tens of thousands of patent licensing contracts since 2019 to gain insights into the market prices of licenses across different industries and produce an in-house valuation model. That model should be able to automatically determine the value of a patent without relying on third-party valuation agencies to expedite the financing process and reduce costs for enterprises.

This sort of approach helps build a strong foundation for robust valuation analysis, according to Andre Toh, EY Asean and Asia-Pacific Valuation, Modeling & Economics Leader. “Historical information on licensing contracts and their commercial terms are critical reference points for the valuation of intangibles, especially patents when adopting the market approach to valuation,” he says. And this could help determine comparables, adjusting for the context of each comparable, and establishing what is representative of the future – bearing in mind the base data is historical information rather than forward-looking, he adds.

However, there are four main limitations to the government’s approach, according to Terry Lu at Lusheng Law Firm and Xinming Ma, general manager of Chinese valuation company Beijing Zhongjinhao Assets Appraisal Co:

1. In certain industries, many transactions are considered commercial secrets, so companies are unwilling to disclose their licensing data. This leads to incomplete data. 
2. Patent licensing contracts reflect the market value of the patents, but the contracts themselves generally do not disclose the approach and methodologies about how to determine the patents’ value.
3. The transaction amount of a patent licensing contract is only one dimension of the overall evaluation of a patent’s market value. Patent value can be assessed from many other angles, including its innovation level, its contribution to a product’s market share, its validity, etc.
4. Relying on historical data may not be fully representative of all types of patents or the latest market conditions, especially for rapidly evolving emerging technologies.

To help address these limitations, Mr. Toh says valuers should also carry out cross-checks with other approaches such as the income approach in order to triangulate and gain comfort on the valuation opinion. He adds:

“The bottom-up nature of the income approach can introduce more discipline, forward-looking and thoughtfulness to the business plans that will support the value of the patent.”

Where does China’s IP financing market stand on the international stage?

The fundamental difference between China’s IP finance market and those overseas is that China’s is government-driven and its financial institutions are state-owned. Banks are required by regulations to have borrowers provide collateral or guarantees – of course, this is risky for banks because the pledged IP may be difficult to liquidate, but under the guidance of national policies banks are willing to accept such risks.

When compared to its neighboring countries Japan and South Korea, China leads in the size and growth of IP financing, Mr. Ma observes.

Both Japan and South Korea offer tax incentives and other policies to encourage the commercialization of IP. In Japan, the government became the first in the world to require publicly listed businesses to reflect the value of their IP on their balance sheets, helping home-grown companies leverage their IP to attract investment. The Japanese government is also seeking to reform its tax system (effective April 2025) to allow for a 30% deduction from income earned through patents and other IP. Meanwhile, South Korea is aiming to grow its IP financing market to US$14.7 billion by 2026 via government-backed private lenders Woori Venture Partners, Shinhan and KEB Hana and with the help of Korea’s Intellectual Property Office, which launched an IP Valuation Management Centre last year.

However, both are smaller in market size and are likely to focus more on strengthening the innovation capabilities of existing large companies than on broadly supporting start-ups, as in China.

And what about Europe and North America? Mr. Ma believes that while China’s rapid development in the field of IP financing is due to strong policy support and economic growth, European countries and the U.S. have advantages in quality and depth. To him, there are three main ways the China and its Western counterparts differ:

• “Policy-driven: The Chinese government has vigorously supported SMEs and start-ups through policy measures such as special funds, simplified approval procedures and risk compensation funds. European and American countries rely more on market mechanisms and have less government intervention, but they provide a more complete legal framework and a mature financial market environment.
• Market size and speed of development: China has a huge domestic market and a rapidly developing economy, which has led to the rapid expansion of its IP financing market, especially in the number of patent applications. Although Europe and the U.S. have a large market size and high maturity, the growth rate is relatively slow.
• Participation of financial institutions: Chinese banks and other financial institutions are actively involved in IP financing, introducing a variety of innovative financial products and using new technologies to optimize their services. European and U.S. financial institutions are equally active but may be more conservative in product design and service models due to higher market maturity and risk control requirements.”

“The two have their own characteristics and may form a situation of complementary cooperation on a global scale in the future,” he comments.