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

Release Time：

2024-12-13

Context: China’s real GDP growth is predicted to decelerate to 4.5% in 2025, from 4.9% in 2024, according to a recent Goldman Sachs report (December 4, 2024 Goldman Sachs article). And that figure could drop as low as 3.4% by 2028 (February 2, 2024 Nikkei Asia article). Despite this, the country has been able to steadily grow its IP-backed financing market, which issued more than 33 billion Chinese yuan (US$4.5 billion) in loans between 2018 and 2023.

What’s new: Recent data published by the China National Intellectual Property Administration (CNIPA) revealed that in the first three quarters of 2024, the country’s IP financing market reached 792.23 billion yuan (US$109 billion), meaning it has already seen a 24% year-on-year increase. Those figures are projected to go up to 1 trillion Chinese yuan (US$137 billion) by year-end, according to Ma Bin, deputy chief of the IP operation and management division under China’s top IP regulator (November 28, 2024 China Economic Net article).

Direct impact and wider ramifications: While this is great news for IP owners in China, Mr. Bin noted in a speech last month that data collection for a valuation model that it has created alongside the Construction Bank of China (CBC) remains a key challenge. “Traditionally, such transactions are considered ‘commercial secrets’, so many are unwilling to disclose them,” he said. So while the country continues to push for a bigger IP financing market, there are questions around how sustainable a government-backed IP finance market is, as well as how the government intends to address the issue of valuation.

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:

In certain industries, many transactions are considered commercial secrets, so companies are unwilling to disclose their licensing data. This leads to incomplete data.
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.
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.
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.”

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