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Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

On one level, there's nothing so surprising about Moody's Investors Service's decision to downgrade China's sovereign debt one notch to A1. Since March last year, when the rating company and its rival S&P Global Ratings cut their outlook on the People's Republic's credit standing, an eventual demotion has been the most likely outcome.

Still, it mustn't have been an easy decision, considering the tongue-lashing they got from the Chinese finance minister at last year's Group of 20 meeting over the "bias" in their assessment.

The timing is also puzzling because it's embarrassingly close to last month's all-important gathering of China's top politicians on "safeguarding national financial-market security". The $450 billion that disappeared in a matter of days from Chinese stock and bond markets -- plus the roughly $50 billion of liquidity injected by the central bank into a nervous money market -- show that investors take President Xi Jinping's resolve to wring the economy of excessive leverage seriously. Moody's is thus sticking its neck out a little when it says the planned reform program will probably slow, but not prevent, the rise in debt levels.

Bravery aside, is Moody's being too pessimistic?

The government's indebtedness is only a problem in China because the corporate sector is overextended. A year ago, a majority of the bonds that were rated AAA by the more effervescent local Chinese rating companies were actually junk on a Bloomberg credit-scoring metric. But today, only 14 out of 127 such bonds -- or 11 percent -- are in that risky category. Things are looking better for corporate debt in China, not worse.

Feeling Safer
Out of 127 Chinese listed firms' bonds with the highest possible credit scores from local rating companies, only 14 are junk on a Bloomberg scale
Source: Bloomberg
Note: HY = high yield; IG = investment grade. With one-year default probability of 0.52% to 0.88%. HY3 is risky debt. IG2 offers the second-best level of safety with default probability of 0.002% to 0.004%.

Besides, if rating changes on Japan's sovereign debt are any guide, investors have every reason to shrug off Wednesday's news.

After all, it costs about $25,000 nowadays to insure $10 million of Japanese five-year debt against default, or about half what investors had to pay when Moody's cut Japan by one notch to A1 in December 2014.

In China's case, it appears that both Moody's and S&P were wrong to have rewarded Beijing's IOUs with an upgrade to double AA territory in the final two months of 2010.

That was a year and half after Fitch Ratings prophetically warned of the banking industry's  "steep rise in corporate exposure" that would over time "take its toll on corporate borrowers' ability to repay." (Incidentally, Fitch hasn't fiddled with its China sovereign rating in almost a decade; so it's spared the embarrassment of any dialing-down now.)

Risk Factor
The spread between top-rated five-year corporate bonds in China and those scored BBB+ has narrowed to about 925 basis points
Source: Bloomberg

The other two have no choice. Staying pat, and hoping that reality will eventually catch up with expectations, doesn't always work. S&P saw that this week when it had to upgrade Indonesia to investment grade -- five years after its rivals.

But any feeling of relief would have been short-lived. Now that Moody's has moved first with China, the ball is once again in S&P's court. That begs the question: How much of this sovereign-rating guff is really about countries' creditworthiness versus pure inter-company rivalry?

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net