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China is lending billions of dollars to technology start-ups and other small companies that use their intellectual property as collateral in an effort to revive credit demand and boost the ailing economy.

According to official figures from China’s National Intellectual Property Administration, the total number of new intellectual property financing loans rose 57 percent to RMB 419.9 billion (US$58.5 billion) in the first six months of 2024 compared to the same period last year, after already increasing 75 percent to RMB 854 billion in the full year of 2023.

The rapid increase in the use of this credit instrument, which is often used in the West by distressed companies without other valuable assets, comes as policymakers seek to restart sluggish credit growth in the world’s second-largest economy.

A prolonged slump in the real estate sector and weak local government finances have undermined corporate balance sheets and reduced banks’ willingness to lend. New renminbi loans to the real economy were negative in July for the first time in 19 years.

Beijing claims that the increased granting of loans against intellectual property – such as patents, trademarks or geographical indications that recognize the special status of regional products – is part of a strategy to promote innovative small businesses.

“Small and micro enterprises need to flourish on a large scale and they require significant financial support, especially in their start-up and growth phases,” said Shen Changyu, office director of China’s National Intellectual Property Administration.

Han Shen Lin, China country director of management consultancy The Asia Group, said that given the volatile nature of Chinese stock markets and the relatively low level of venture capital activity, smaller banks were stepping in – encouraged by the government’s recognition of intellectual property as legitimate capital.

“I see this as a plan to get money into the hands of technology companies,” Lin said. “The political imperative to fund technology sooner will outweigh the concern about later, likely non-performing loans.”

Lin added that banks in the West generally made modest loans against stable, royalty-generating intellectual property of established companies. That China would consider expanding such financing to accelerate new technologies is more controversial, he said, given the difficulty of valuing Chinese intellectual property, which is mostly new and comes with limited cash flow.

China approved 921,000 invention-related patents in 2023, up 15 percent from the previous year, and about 4.4 million trademarks, state news agency Xinhua reported.

Gao Huasheng, a professor at Fudan University’s School of International Finance, said the intellectual property financing initiative aims to support companies that do not have significant physical assets such as land or machinery. He added that China’s Intellectual Property Administration “offers interest rate subsidies to encourage banks to provide such loans.”

“The original intention was to support high-tech start-ups, but in practice this policy can be applied more widely,” Gao said, noting that efforts are also underway to create a larger auction market for intangible assets in the event of defaults.

The government rules also provide some more leeway for non-performing loans in IP financing portfolios and exempt bank employees who have followed proper procedures from personal liability if the loans become delinquent.

One company, Beijing Guoxinda Data Technology, which uses big data to evaluate real estate projects for banks and the regional government, said it borrowed RMB 8 million under the program because it was promised interest refunds.

“The loan was like the icing on the cake,” said a company representative who asked not to be identified. They said they would use the money for expansion.

However, according to the Financial Times, the program is also being used by distressed companies in other sectors that have liquidity problems.

One of these companies, Yichun Xianghe Agriculture Technology Development Co., a rice processing group in northeastern Heilongjiang Province, borrowed 10 million RMB after running into liquidity problems due to the coronavirus pandemic and typhoons.

Another company, Yichun Xingshun Woods, a wood processor in the same region, received RMB 4 million after its working capital shrank due to a rise in raw material costs, according to local media and government announcements.