China gets creative to boost lending to tech start-ups

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China is unleashing billions of dollars of lending to technology start-ups and other small companies using their intellectual property as collateral as Beijing seeks to revive demand for loans and stimulate a lagging economy.

Total new intellectual property-pledged financing loans soared 57 per cent in the first six months of 2024 compared with the same period last year to Rmb419.9bn ($58.5bn), after increasing 75 per cent to Rmb854bn for the full year in 2023, according to official figures from China’s National Intellectual Property Administration.

The rapid escalation in use of this lending instrument, which in the west is often used by distressed companies without other valuable assets, comes as policymakers try to revive sluggish credit growth in the world’s second-largest economy.

A prolonged property sector slowdown and weak local government finances have undermined corporate balance sheets and reduced banks’ appetite for lending. New renminbi loans to the real economy turned negative in July for the first time in 19 years. 

Beijing contends that the increased issuance of loans against IP — such as patents, trademarks or even geographical indications that recognise the special status of regional products — is part of a strategy to boost innovative small companies.

“Small and micro enterprises need to flourish on a large scale, and they especially require substantial financial support during their start-up and growth stages,” said Shen Changyu, bureau chief of the China National Intellectual Property Administration.

Han Shen Lin, China country director at The Asia Group consultancy, said that with China’s stock markets rangebound and venture capital activity relatively depressed, smaller banks were stepping in — helped by the government’s recognition of intellectual property as legitimate capital.

“I see this as a scheme to get money out to the tech firms,” said Lin. “The political imperative to finance tech earlier will outweigh the concern of likely non-performing loans later.”

Lin added that banks in the west generally offered modest loans against stable, royalty-generating IP held by mature companies. That China would consider scaling up such financing to accelerate new technology would be more controversial, he said, given the difficulty of valuing Chinese IP, most of which is new and associated with limited cash flow.

China authorised 921,000 invention-related patents in 2023, up 15 per cent from a year earlier, and about 4.4mn trademarks, state news agency Xinhua reported.

Gao Huasheng, professor at the School of International Finance at Fudan University, said that the IP financing push was aimed at supporting companies that lack significant tangible assets, such as land or machinery. He added that China’s Intellectual Property Administration was offering “interest rate subsidies to incentivise banks to issue such loans”.

“The initial intent was to support high-tech start-ups, but in practice, the policy can be more broadly applied,” said Gao, noting that efforts were also under way to create a bigger auction market for intangible assets in the event of defaults.

Government regulations also provide slightly more leeway for non-performing loans in IP financing portfolios, and exempt bank officers who followed proper procedures from personal liability if they turn sour.

One company, Beijing Guoxinda Data Technology, which uses big data to evaluate real estate projects for banks and the regional government, said it borrowed Rmb8mn under the scheme because of the promised interest rate refunds.

“The loan was like icing on the cake,” said a company representative, who requested anonymity. They said they would use the money for expansion.

But the scheme is also being used by distressed companies in other sectors that have cash flow problems, the Financial Times found. 

One such company, Yichun Xianghe Agriculture Technology Development Co, a rice-processing group in north-eastern Heilongjiang province, borrowed Rmb10mn after experiencing cash flow problems caused by the coronavirus pandemic and typhoons.

Another, Yichun Xingshun Woods, a wood-processor in the same region, received Rmb4mn after an increase in raw material costs cut into its working capital, according to local media and government notices.