Use of IP as collateral puts China ahead in innovation race

Editor's note: Djoomart Otorbaev, a special commentator on current affairs for CGTN, is a former prime minister of Kyrgyzstan, a professor of the Belt and Road School of Beijing Normal University, a member of Nizami Ganjavi International Center, and the author of "Central Asia's Economic Rebirth in the Shadow of the New Great Game." The article reflects the author's views and not necessarily those of CGTN.

An innovative lending mechanism using intellectual property (IP) as collateral is rapidly gaining momentum in China. The total number of new IP-backed loans surged by an impressive 57 percent in the first six months of 2024 compared to last year, reaching 419.9 billion yuan ($59 billion), as per the China National Intellectual Property Administration (CNIPA). This rapid growth underscores the potential of this financing method, which had shown steady growth between 2016 and 2022 at an impressive annual growth rate of 28.4 percent.

A critical factor in this is the government's legal recognition of IP as legitimate capital, pointing towards a promising future. This significant and intriguing trend paves the way for a new era of financing and its potential adoption elsewhere.

The use of IP as collateral, however, is not a new concept. It has a rich history that dates back to the late 1800s. A notable example is American inventor Thomas Edison, who used his patent for the light bulb to secure financing for his General Electric Company. This long-standing practice, rooted in the innovative spirit of entrepreneurs like Edison, has become more common, demonstrating the enduring value of IP in the business world.

However, as the world moves into the era of the latest technological revolution, this process has accelerated to unprecedented levels. It has become commonplace to see previously unknown technology companies and startups rapidly grow into multi-billion dollar corporations. In most cases, access to funding for innovation is critical to a company's success. However, the lack of traditional collateral, such as real estate or equipment, often limits access to funding, thereby limiting the growth potential of these firms.

Numerous successful examples exist of using this method to raise capital. A notable recent case is American biotech startup Moderna, which used its patent portfolio to finance research and development. In 2020, the company secured additional funding to develop a COVID-19 vaccine. This strategy played a crucial role in the swift development of their highly effective vaccine, inspiring hope and confidence in the potential of this financing method.

The value of intangible assets, particularly IP, in the valuation of companies, especially in the technology sector, is snowballing. The added value of IP-intensive sectors as a share of total GDP for the EU, the U.S., South Korea, and the UK currently makes a significant contribution to GDP, amounting to between 38 and 45 percent. The increasing value of intangible assets in the business world makes IP-based financing an increasingly attractive and relevant option for companies and a key player in the evolving business landscape.

The use of IP as collateral is quickly gaining global attention. According to a 2020 study, intangible assets, primarily IP assets, comprised 90 percent of the total assets held by the Standard and Poor's 500 companies (S&P 500 companies), significantly increasingfrom 32 percent in 1985 to 68 percent in 1995.

Another study suggests that as of 2018, S&P 500 companies held over $21 trillion in intangible assets, compared to approximately $4 trillion in tangible assets such as inventory, real estate, and equipment.

There has been a significant interest in patenting IP in recent years, partly because it can lead to additional financing. In fiscal 2023, the U.S. Patent and Trademark Office issued over 346,000 patents, about double the over 180,000 patents issued in fiscal 2000. However, the market for loans backed by IP still has untapped potential, and only a small percentage of firms in the U.S. use their IP as collateral.

China's achievements are impressive. In 2023, it issued 921,000 invention patents, or 15 percent more than the year earlier, over 2 million utility models, 638,000 designs, 4.3 million registered trademarks and 11,300 registered integrated circuit topography designs. In addition, 201 collective trademarks and certification trademarks were approved for registration with geographical indications.

Applications for international registration of patents, designs and trademarks filed through the Patent Cooperation Treaty, and The Hague and Madrid systems for international trademark protection stood at 73,812, 1,166 (for the previous 11 months of 2023) and 6,196 respectively, the best figures in the world.

Additionally, according to the CNIPA, China is quickly developing a unique functional ecosystem that includes IP offices, financial institutions, IP appraisers, and insurance companies. This ecosystem aims to support the use of IP as collateral. So far, approximately 17,000 projects have benefited from this initiative, providing an advantage to 15,000 enterprises.

These figures are imposing compared to even those of developed countries. For instance, the IP financing market in South Korea is only 3.5 percent of China's.

The new financing method has gained substantial support in China. Recent decisions by the Chinese leadership have emphasized the importance of supporting private enterprises and accelerating the growth of the innovative sector of the economy. With their creative ideas, small and medium-sized enterprises and technology startups are considered the main drivers of modernization, qualitative development, and the future of the business world. China once again has found a new way to accelerate the growth of its technology sector and has pulled ahead in the global race for innovation.

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