At the end of 2008, the State Intellectual Property Office of the People’s Republic of China (SIPO) selected the first batch of pilot units for intellectual property pledge financing. By the end of this September, the second group had also been formally launched. In just a short year, the tide of IP pledge financing has expanded to the entire country. However, the governments are the main promoters behind the fast expansion of the new type of loan financing. They not only formulate policies, but also promote the development of pledge financing through various means. However, the pure market actions loom in the shadows of the governments.

From the outset of this year, China IP Magazine has reported on the developments of IP pledge financing in Beijing. Ever since 2007, the Beijing Intellectual Property Office (BJIPO) had begun to promote the development of IP pledge financing; until now, the total amount of pledge loans has exceeded 600 million Yuan, and pledged properties have begun to go beyond trademarks and patents.

On November 6, 2009, this magazine, in association with the IP channel of People’s Daily Online, held an exclusive interview with Liu Zhengang, Director of BJIPO.

Liu Zhengang: As far as the greater background is concerned, IP pledge financing relates to social advancement, because since the entry into the information age, IP has assumed a more important role. To be specific, large foreign corporations have established two balanced and independent management systems in assets management, namely, management systems of tangible assets and intangible assets, both of which are able to bring new profits to the enterprises. With the development of reform and opening up in China, more and more IP have been accumulated to translate into some type of properties, thereby laying a foundation for the formation of IP pledge financing.

Surely, this is a great background. If it is necessary to be particularly concrete, there is a need for supporting institutions, such as assets appraisal institutions and legal appraisal institutions. Certainly, banks shall be able to accept the concept of intangible assets. In Beijing, there was demand and supporting institutions were also relatively adequate. Therefore, Beijing started the business relatively early in China.

Liu Zhengang: Yes, there are difficulties in copyright pledge financing although there are success stories in Beijing. Copyright pledge financing is particularly used in film and entertainment sector. Beijing’s Daye TransMedia Group Ltd. received 80 million Yuan in a bank loan through pledging its film and television products, which is not only a result of exploitation of copyrights, but also one of the largest loans in terms of total amount and hence is a very typical example. In addition to the above, the pledge loan is plentiful in Beijing and so it is more of a mixed pledge. For example, we say a film and entertainment company may pledge its copyright to get a bank loan, in the meantime, its company name may be its trademark, and certainly, it is a combination of trademarks and copyrights.

Liu Zhengang: Appraisals are specifically conducted by IP appraisal companies in the society. However, at present not many IP appraisal companies qualify. In Beijing appraisal is mainly conducted by Liancheng Assets Appraisal Co., Ltd., which is mainly determined by the market. We also hope to have more IP intermediary institutions to join the sector.

 

Liu Zhengang: This is indeed a big problem in intangible assets appraisal. It is no exaggeration to say that this is a common problem the world faces, and is a global, historical and practical problem as well. But how can we find a solution to the discrepancies between appraisal companies? As a matter of fact, a company which conducts an appraisal shall also be joining in the chain of IP pledge loans. In the meantime, it means that the company shall bear corresponding liabilities for any appraisal mistakes. In this way, everyone shall be as cautious as possible in any appraisal. One thing we fear most is that when an appraisal conducted by a company is over, the step is deemed over, another company steps in to help to get loans, only to find that the appraised value was too large to be practical, then ensuing liabilities will shift to others or to the society. Preferably, greater caution may be ensured in the appraisal through mutual constraint in interests.

Liu Zhengang: Based on the present situations, there are three types of government roles in the promotion of IP pledge financing across China. The first type lists enterprises as main players, namely, a relatively complete business chain is formed from within. All rights shall be shared by banks, enterprises, appraisal institutions including insurers, and all obligations shall also be borne by them as well. We term this type as a market-oriented mode of pledge financing. The second type involves governments, or some agencies entrusted by governments, which play a very important role. To be specific, the governments help with formation of such a system, namely, rights shall be shared by the relevant entities and the corresponding obligations shall be borne by them and the governments as well. And we define this type as a government-driven type. The last mode is that no qualifications exist for a market-driven pledge loan, in the meanwhile, the governments are not willing to be involved completely in such a chain, it is, therefore, a half-driven type. There are mainly such three types. BJIPO mainly belongs to the first type, namely, the market-driven type.

Liu Zhengang: The government does not quit at will, but keeps watchful eyes on the beginning and ending of every procedure. At the outset, we have done a lot of preliminary work to push forward large-scale cultivation of pledge loans. We, first of all, allow banks to accept the lending mode of IP intangible assets. Then we need to nurture intermediary institutions, including appraisal centers, appraisal companies and specialized law firms. When all these elements are formed, the problem is how to make the elements associated with each other and then operational. During the process, we are not directly involved in the rights regime, but we keep a close eye and adjust their relationship with a view of pushing for a positive change. I think, judging from conditions of Beijing, that is, the number of IP ownership and quality of ownership are relatively better, and there are many banks. Furthermore, intermediary institutions, either our IP appraisal companies, or specialized law firms, are of high quality. Given that, I think that Beijing government shall not go too upfront in the promotion of IP pledge financing. We should try our best to stimulate active elements of the market, making them an organic and rational whole. I am mainly concerned about that the government shall not participate too much in economic activities in the market operations on the sole basis of passion and good will. As regards this issue, I think the government should do less instead of more, and prefer “say” to “do” if necessary.

Liu Zhengang: Currently there are mainly two measures. One is provision of subsidies to enterprises, why? Because the enterprise is a small and medium-sized enterprise which has limited finances and needs to get loans from banks. In this way, some interest levied on the enterprise may be relieved to encourage it to get bank loans in a bold manner. On the other hand, since guarantee companies are also new phenomena, and many of them dare not offer guarantees in a bold manner. Therefore, the government will grant some subsidies to the guarantee companies. In the event of any insurance payment claims, the government will provide certain proportionate compensation to encourage more bold guarantees. The current policies are directed to consider banks more which are now not courageous enough to lend because they are not familiar with pledge financing and feel it is too risky. We just want to provide a sense of safety to banks through adoption of policies. In this way, banks can lend in a bold manner. We call it IP pledge financing turnover capital. For example, suppose a bank lends one million to an enterprise which is required to make repayment within a reasonable period of time, the enterprise encounters problems and is suddenly no longer able to make such repayment, for example, in a financial crisis, what shall we do? The bank, through its own coordination within the statutory time limit, may enable the enterprise to make repayment as scheduled. In the event that partly repayment is made and the balance is acceptable, the government will assume the role of a bank and offer a turnover period to the enterprise and repay the balance to the bank, so that the enterprise may get an extended repayment period, which also helps to take a number of other remedial measures. Another question is that if an enterprise ultimately fails to repay its loans within the time limit, I must dispose of its pledge rights. Its trademarks, as well as patents, may be auctioned. After the auction, if the balance can be repaid and then everything is over. If the amount fails to repay the balance in full, I repay 700,000 and the auction price is only 400,000, what shall I do? At that time I am afraid that the insurance company shall repay the balance.

Liu Zhengang: Because the key to small and medium-sized enterprises rests with banks. If banks are willing to lend, enterprises, however, are not willing to borrow, why not? Because they feel that it would be costly to pledge their IP to get bank loans. Therefore, our policies shall give a helping hand in interest payment of banks. Currently the main problem is that banks have too many worries. We know that banks are not willing to lend is a common phenomenon. The said measures are available across the country. The IP pledge loan turnover capital Beijing government is now considering has not been tested in any parts of the country.

Liu Zhengang: I think the matter has been a common concern across the country. But whether or not any region should launch such a business or in what way shall be based on actual conditions of the region. My experience is that I shall inform brothers of the industry or other IP departments of the fact that any concern for this matter does not mean any immediate launch since the maturity levels differ from region to region. Therefore, sometimes we should be good at waiting. Waiting means that when a certain region has relatively mature market elements and can put them together for timely operations, then we should make promotions. One of the market elements is that there are small and medium-sized enterprises in the region, and that some enterprises have quite a number of IP and intangible assets, which is the basis of pledge loans. In the meanwhile, banks should try their uttermost to be familiar with the status of IP and find their characteristics. Then appraisal institutions shall make accurate appraisals to control operations of the loan process.

Liu Zhengang: Theoretically yes, but actually it is unnecessary. In fact, if a business relies on a technical solution, it would be better to find venture capitals or other means of financing. Banks are very cautions in their investment; therefore, it is difficult to persuade banks with only a patent and passion.

Liu Zhengang: The current intangible assets pledge financing has provided another channel for the development of small and medium-sized enterprises. However, it remains a sea spray, far away from large in scale.

Liu Zhengang: Certainly, as far as our promotional work is concerned, I think the current figures are too low in terms of needs and potentials from the society. From the current perspective, the higher, the better. However, I do not quite understand banking business. Banks have a control on intangible assets and may have reasonable judgments balanced against tangible assets. In Beijing, at least for the past three to five years, the loans will hit more than 1 billion a year, and climb to 2 to 3 billion five years later. 3 to 4 billion can not be deemed either as much or too little. More than 1 billion to 2-3 billion over the past 3 to 4 years cannot be deemed to be too little. Maturity of some matter, just like a baby who, as he grows up, begins to have milk or breast milk, and then begins to eat food, is a gradual process. We also hope that IP lending is also a gradual process, and we do not want to have too many all of a sudden. Otherwise, big risks will arise. If we carve for excessive happiness and success, more hidden dangers may ensue.

Liu Zhengang: The main difficulties lie in acceptance of the society. Some might consider IP pledge financing too ideal, particularly some non-service inventors always think that their patents are very precious, and therefore, banks should grant loans to them. But it is not the case in reality. On the one hand, those who need loans demand too much and cannot get satisfaction from the society, which is also likely to lead to new instability. On the other hand, we need to persuade the relevant authorities to push forward this work with caution. The third is that we shall also need to persuade banks, financial institutions and enterprises with practical experience to take bolder steps. Therefore, our work is just like adjusting a puppet, pulling strings to make adjustments in the event of imbalances.

Liu Zhengang: The most important is the emergence of above-mentioned IP pledge financing turnover capital. On the other hand, we think that if there is a source of water, we would like to activate inventors, so that their achievements may be integrated into legally acceptable types, varieties and trademarks. Once generated, we would push for use of the inventions. For such purposes, IP-related supplemental provisions to investment projects, namely financial investment projects, will be enacted by Beijing government.