Global trade credit insurer Euler Hermes has warned of heightened insolvency risk and deteriorating payment terms in China amid the high profile interest payment default by a property developer.

In a report released on January 26, Euler Hermes economic research expects the number of Chinese companies filing for bankruptcy in 2015 to grow by 5% - representing an estimated total of 2,760 - as liquidity tightens due to the crackdown on shadow banking, overcapacity in the real estate sector and greater fiscal discipline by local governments.

However, in view of the complex and costly procedures involved, insolvency cases in Chinese courts, Euler Hermes points out, are still relatively rare in absolute terms. It notes that an increasing number of Chinese companies lacking access to bank financing must look for alternatives, with a growing number choosing to delay payments to suppliers or asking for extended credit terms to their business partners.

"Chinese buyers are essentially increasingly turning to local exporters for more credit," says Euler Hermes commercial director for Asia-Pacific Anil Berry. "They are also insisting on open account terms, whereas traditionally they were happy to pay on letters of credit or even on advance payment terms."

A crucial component of the healthy cash flows for any business is the speed with which buyers pay for goods and services received on credit terms. The Euler Hermes research shows that in China, this indicator has deteriorated significantly over the past three years. As measured by days sales outstanding (DSO), the Chinese buyers, on average, take 90 days to settle invoices - much longer than the global average of 73 days.

In addition to these stretched credit terms, Euler Hermes notes that 25% of payments from Chinese companies are overdue, while the rate of non-payment has increased 104% in 2014. Food (+450%), chemicals (+206%), commodities (+150%), and computer and telecom (+129%) are the sectors most severely affected.

This creates a dilemma for many Hong Kong and Taiwanese businesses as China remains a key growth market for many exporters. In a recent Euler Hermes market survey of 100 Hong Kong exporters, it showed that many plan to trade more with markets where they gauge payment default risk is low - with one notable exception. Nearly 80% of the Hong Kong exporters already or plan to supply products to China, though 69% are concerned about the payment risk in this market.

"For exporters, distinguishing trade signals from noise has become an increasingly vital mandate," says Edmond Lee, general manager of Euler Hermes in Hong Kong. "The key is to identify the real opportunities and select the right partners, which can be a challenge when potential customers do not always provide adequate levels of transparency on the state of their finances."

Euler Hermes' research expects the Chinese economy to expand by 7.3% in 2015, suggesting that opportunities to participate in China's growth story are still plentiful.