An annual survey of 1,000 Chinese companies by the global credit insurer Coface revealed that eight out of 10 experienced overdue payments in 2015.

This continuing trend reflects the economic slowdown in China, from 6.9 percent GDP growth in 2015 to 6.5 percent in 2016.

Among the economic concerns this year are the unsolved issues of high leverage and overcapacity in many sectors, downward pressure on the RMB and stock market volatility.

In 2015, the average credit terms offered by China-based firms decreased again, reflecting a more prudent approach to granting credit to customers. This is probably the result of weak payment experience in recent years combined with slower growth expectations.

Risks have increased, with 80.6 percent of respondent companies experiencing overdue payments in 2015 compared to 79.8 percent in 2014. Of these, 58.1 percent also reported an increase in the overdue amount. A higher percentage of respondents, 10 percent of the total, up four percentage points, said that average overdue periods have been longer than 150 days, and 17.9 percent of surveyed companies saw overdue accounts of over 180 days exceeding five percent of their annual sales. The rise of ultra-long payments is putting increasing pressure on company financials.

The findings are in line with the non-performing loan (NPL) figures released by the China banking Regulatory Commission. The NPL ratio reached 1.59 percent as of the end of 2015, its highest level since 2009. NPLs rose by more than 50 percent in the first three quarters of 2015. In this context, the risk of a rise in non-payments should not be underestimated.

“The government’s strategy is ambiguous and the authorities are caught between two objectives,” said Charlie Carré, Coface Economist. “They need to find a balance between, on one side, supporting GDP growth to prevent a hard landing and to protect jobs, while on the other side managing the debt bubble risk. At the same time, businesses in China are facing increasing challenges, such as high leverage with steep costs of financing (despite monetary easing), low profitability (driven by large overcapacities in certain sectors) and volatility on the foreign exchange and stock markets. Monetary easing measures were very effective in 2015 and Coface expects more stimulus packages in 2016, as the Chinese authorities endeavor to avoid a hard landing.”

Chinese firms that are suffering from overcapacity and low profits now have a higher probability of default, since the government has decided to tackle overcapacity and so-called zombie companies. Even though credit growth is slowing, private debt is continuing to grow faster than GDP. China has not yet entered a deleveraging process and the risks are increasing. Outstanding debt held by the private non-financial sector reached 201 percent of GDP in June 2015, compared to 114 percent in June 2008 and 176 percent in June 2013.

China’s 6.9 percent GDP growth in 2015 was the lowest in 25 years, and the 2016 forecast reflects the continuing downward trend. The authorities are implementing reforms needed to rebalance growth in favor of consumption and services. Despite the positive payoff in the medium term, this rebalancing has had some short-term negative effects, hitting profits and exacerbating credit risk for companies.

Since January, stock markets in China have been experiencing a new episode of plunges and volatility. The heavy use of margin has increased credit risks and could intensify the downwards spiral. At the same time, China’s currency, the RMB has recorded an unprecedented drop, to reach a five-year low against the U.S. dollar during the first week of January. The RMB’s valuation is also suffering from capital outflows, worsened by worries about the Chinese economic slowdown.

On the monetary side, the People’s Bank of China (PBoC) initiated an easing cycle in November 2014 and has since cut the prime lending rate six times, lowered the required reserve ratio of banks five times, and injected liquidity into the economy to the tune of 1.5 trillion RMB in January 2016. Even so, monetary easing measures have not been effective thus far.

According to Coface’s survey, the construction sector appears to be the most at risk with 28.3 percent of credit sales in overdue by more than 150 days and 57 percent of respondents have more than two percent of their revenues impacted by overdues of more than six months. Metals and IT report, respectively, 13 percent and 15.2 percent of overdue credit sales of more than 150 days – while telecom is also under pressure. Some sectors are in better shape but even household spending-related sectors, such as retail and automotive, are seeing a deterioration in their payment experiences.