Banking & Finance

Intangible lending

Chinese banks experiment with loans collateralised by patents

Intangible lending

A new form of drug money

The year 1421 was more seminal to the course of world history than most people think.

It was a year in which China launched the greatest navy that had ever been. Author Gavin Menzies reckons Admiral Zheng He’s fleet reached America and Australia and could have seen China become a global power – long before most European nations had forged their own colonial ambitions.

However, on the evening of May 9 a thunderbolt struck the newly built Forbidden City in Beijing and burned much of it down. This was viewed by the Ming court’s conservative faction as a sign from the gods. They ordered the navy dismantled, and all Zheng’s maps of discovery destroyed.

On the somewhat quieter banks of Florence’s Arno another seminal event was occuring. The first modern patent was being granted to architect, Filippo Brunelleschi for a barge with a hoisting gear, which he had designed to move marble.

Almost 600 years later, China is once again experimenting with naval power. But perhaps more important is what it is trying to do with patents.

Ever since Brunelleschi received his three year patent in 1421, the device has served as a vital tool for innovation, and been one of the main drivers of the capitalist system. China – which has for decades been viewed as a patent infringer extraordinaire – has now got religion on the benefits of intellectual property. Recently the director of the State Intellectual Property Office, Tian Lupu, stated: “There is no country that can thrive and survive on piracy.”

But for every stick there must be a carrot and in order to promote patents and other forms of intellectual property, China has began experimenting with a new form of loan that allows IP to be used as collateral.

This is encouraging new attitudes to patent ownership. The Oriental Outlook newspaper reflects that normally in China “intellectual property only reflects its value through negative effects (by being infringed), but now its value can be realised in money.”

The newspaper reports that at the end of March a groundbreaking transaction occurred in Foshan. The Nanhai Qinlian Medical Instrument Company was able to secure a loan of Rmb4 million ($584,000) on its intangible assets – i.e. the patents and trademarks it held. This was the first time such a loan had been structured in Guangdong province – and is being piloted as an experiment by the State Intellectual Property Office in Nanhai, which has arranged the financing. If successful, the product will be promoted more widely, says Ma Weiye, the director of the Patent Management Office at the State Intellectual Property Office.

Many are optimistic that this could be an increasingly valuable source of financing for Chinese firms. “The promotion of financing based on the pledge of intellectual property will be speeded up,” forecasts Yang Songtang, the assistant secretary general of the China Appraisal Society. At the beginning of the year the State Council advocated the financing technique as did the Ministry of Science and Technology.

The potential demand is huge. Bank of Communications, which has shown great interest in this field, recently completed a study in Beijing of 300,000 small and medium-sized enterprises, and thinks 64,000 firms would be eligible for loans that used their trademarks and patents as collateral. It calculated that as much as Rmb80 billion of credit could be extended to this group.

However, insofar as its own risk appetite is concerned, the bank will only consider lending to companies that have patents which are valid for eight years or more; and it will also only lend 25% against the IP’s appraised value.

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