At the end of 2008, under a special program by the Beijing Intellectual Property Office dubbed “Rendezvous for a Hundred to a Thousand” (coordinating a hundred IP firms to help a thousand IP-based companies), 37 small and medium-sized technological companies in Beijing obtained loans totaling 402.75 million Yuan from the Bank of Communications for 44 projects by borrowing against their intellectual property rights.  In August, 2008, the Intellectual Property Office of Beijing’s Haidian District (“Office”) offered 10 million Yuan, interest-free head start financing, along with related policies to push forward IP pledge loans. On January 3, 2009, recommended by the Beijing Intellectual Property Office, the Haidian office became one of the pilot sites for corporate funding through IP pledge loans.

The government, whether through central or local intellectual property administrations, is the driving force behind such IP-based financing endeavors, by participating in a series of policy making steps. What ought to be completely a market-based activity, what role is the government playing, and to what extent?

Beijing IP Office bridges corporations

On August 16, 2006, the Beijing Intellectual Property Office launched its “Rendezvous” program; a government effort to provide a platform of IP information to corporations. The program also covered many other special fields, such as an early warning system for overseas patents and IP rights in exhibitions and conventions.

In January 2007, after being introduced to one of the “hundred firms” in the program, the Liancheng Assets Appraisal Ltd., Co., the Bank of Communications, Beijing Municipal Branch approached the Beijing Intellectual Property Office in the hope of winning government support in promoting its business for IP financing to small enterprises.

For nearly six months, the Beijing Office realized that many hi-tech SMEs could not obtain financing for their patents because they did not have tangible property to secure against the loan and that financial products secured against such intellectual property was a solution to their problem. Therefore, the Office integrated these IP pledge loans into the “Rendezvous” program.

“Intellectual property is intangible and people always believe that pledge loans involve risks. But an IP pledge loan offers a way to solve the financial difficulties faced by small enterprises. Actually, it would be a good thing for both the bank and the enterprise as long as we can manage the risks and put money in companies with perfected IP rights,” said Zhang Boyou, the person in charge of patent administration for the Office.

In April, 2007, after nearly four months of negotiations and communications with the bank and the evaluation of various institutions, the Office signed a framework agreement on IP pledge loans with the Bank of Communications, Beijing Municipal Branch in which the bank offered a 2 billion Yuan fund for loans to SMEs, chiefly based on collaterals using patent and trademark rights. When speaking about the government’s role in the deal, Zhang said, “We will not be involved in specific cases.”

Under this principle, the Office promoted the program at both municipal and district levels and supported the Bank of Communications, Beijing Municipal Branch to conduct the business of pledge loans. Also, when the Office publicizedd IP laws and cases to SMEs, they added pledge loan knowledge to enhance the SMEs’ awareness on the terms and forms of pledge loans. Then the SMEs could enter into a normal procedure for a loan. 

The “Daxing model”

With the Daxing District’s assistance, a promotion event was held by the Beijing Office and the Intellectual Property Office of Daxing District. Many companies showed interest in the pledge loan program and consulted with the bank and the offices.

The Yizhuang Sub-branch, under the Bank of Communications, Beijing Municipal Branch, was the first to act. Under the Beijing Intellectual Property Office’s instruction, the Daxing Office also took this opportunity and started government efforts in this regard, creating a method later known as the “Daxing mode” — IP offices will collect the pledge applications by companies and submit qualified companies, both in credibility and economic prospect to the bank for further examination. Then, they will be recommended to assets appraisal institutions or law service organizations to appraise the stability and value of the intellectual property. At last, the bank will decide whether to provide loans to the companies or not.

In answer to fears that the government would interfere with bank business, Zhang explained: “The District office is only responsible for the first screening, and acts according to criteria agreed to with the bank. It is the bank that is responsible for the evaluation and the final decision that follows, so government recommendations are not decisive. This is, after all, free market behavior. The bank also believes that companies evaluated in this way are the best.” 

Meanwhile, another government measure, the interest discount, was also instituted. Zhang explained: “Since the interest rates of commercial banks are relatively high, the government offered a helping hand in the form of an interest rate match to alleviate the burden on companies. The current effort is 50%.”

The Beijing Office, which was the first to launch the policy, once offered a 1 million Yuan fund, while the Haidian Office went further by providing a 10 million Yuan fund in August, 2008.

Testing the waters in Haidian District

“Among China’s 50,000-odd hi-tech SMEs 20,000 are in Beijing, including 17,000 in Haidian. Such a huge number of businesses face the same problem in financing. That’s why we decided to promote IP pledge loans,” said Liu Xiangyang, deputy head of the Haidian District’s Intellectual Property Office.

The Haidian Office began to research pledge loans in Beijing in early 2008, by speaking with the staffs of Beijing Intellectual Property Office, Daxing District, the bank, and corporations. Then, on August 1, 2008, it launched the district’s pledge loan policy by offering a 10 million Yuan interest discount subsidy from the fund of the Haidian District’s Science & Technology Committee.

“In making this policy we also created for ourselves a position that is neither over nor under intrusive for the job,” said Liu.

For that purpose, Haidian carried out a post-payment interest discount: within one month after signing a loan agreement with the bank, a corporation must record the deal at the Haidian Office, and apply for an interest discount with the government (in the amount of 50%, with no more than 400,000 Yuan for each corporation each year) after paying back the loan under the terms of the loan.

In September, 2008, Haidian submitted its application to become a pilot site for IP pledge loans, and was recommended by the Beijing Office to the State Office. On December 12, 2008, it became one of the six pilot sites in the nation and signed a letter of authorization with the State Office with a term set to continue until 2011.

The government’s work before 2011

Liu said, since the pledge loan was still at a fledging stage and many policies were under discussion, they will focus their work in four areas.

First, Haidian expects a breakthrough in the lending program, which is currently limited to patents and trademarks. For the Zhongguancun area, where numerous IT businesses are located, software copyright may be a new focus. For different pledges, the Office does not expect a “one-size-fits-all” policy, that is, different interest discount standards will be applied to different pledges according to their technological content.

The Office also considers something new for the policy of “non-engagement in the market and no risk.” One possibility is to extend the post-payment interest discount program.

When asked whether such a measure would interfere with the market, Liu said, “encouragement is also a principle of ours, and the measure can be allowed as long as it is well controlled.”

In addition, the Haidian Office will continue to focus on publicity and training. Three or four promotions will be held for corporations each year, while the training program chiefly targets evaluation institutions and bank staff to better equip them with IP knowledge.

“Of course, much more work is still under deliberation, especially for expanding bank participation, because we hope more banks can cast their eyes on hi-tech SMEs,” said Liu.

 (Translated by Li Heng)