China's downgrade from Moody's yesterday came as a surprise, the first such move since 1989. Markets winced a little, then shook it off. A national debt binge is a bit hard to quantify in investors' heads, I dare to say.
It's a vote of no confidence in China's reforms, as I explained when the downgrade came. But debt woes do spell trouble for Chinese companies, not just the boys in Beijing.
There are specific companies to watch now that their debt burdens grew a little more expensive to service. They'll also find it a little bit harder to borrow internationally.
U.S. and European investors tend to invest in the best-known Chinese companies, with global reputations if not operations. There's therefore potential collateral damage if there's a sentiment shift on China and the doom casts itself over names like China's dot.coms. Tencent (TCEHY) , Alibaba (BABA) - Get Alibaba Group Holding Ltd. Sponsored ADR Report , JD.com (JD) - Get JD.com, Inc. (JD) Report and Baidu (BIDU) - Get Baidu, Inc. Sponsored ADR Class A Report are top of most investor lists.
"They may see some selling," Aidan Yao, the senior emerging Asia economist at AXA Investment Managers, admitted in a note released with Jim Veneau, the company's head of Asia fixed income, and senior portfolio manager Honyu Fung.
Likewise, China's sprawling oil conglomerates may suffer. In particular, watch China Petroleum & Chemical, better known as Sinopec (SNP) - Get China Petroleum & Chemical Corporation Sponsored ADR Class H Report , as well as CNOOC (CEO) - Get CNOOC Limited Sponsored ADR Report and China National Petroleum, the parent of PetroChina (PTR) - Get PetroChina Company Limited Sponsored ADR Report , again as the previous winners of any investment beauty pageant.
While U.S. and European investors may get antsy and trim positions, regional investors are a little more loyal. They "will be firm holders of Chinese paper, though weaker credits may experience some selling," the AXA team say.
Chinese investors are the largest holders of foreign debt, though. They're likely to be un-phased by Moody's move, and will likely actually manifest as bidders on any paper or equities that sell off.
Property developers and banks are the two industries most likely to borrow internationally, often floating bonds in Hong Kong. They'll now find their cost of finance more expensive.
The rating agency downgraded 26 Chinese companies at the same time that it took China down a notch. In a command economy, what starts at the top, trickles down. And state-owned enterprises, while essentially functioning with a government mandate, suffer when the national accounts do, too.
Those downgrades include all the oil companies above, as well as their investment arms.
China Mobile (CHL) - Get China Mobile Limited Sponsored ADR Report , the country's leading mobile-phone operator, was top of the list not only alphabetically, but surely also in the minds of investors.
Other noteworthy companies for international investors include automaker Dongfeng Motor Group (DNFGY) , which has joint ventures with Kia (KIMTF) , Honda Motor (HMC) - Get Honda Motor Co., Ltd. Sponsored ADR Report , Peugeot (PUGOY) and Renault (RNLSY) in the mainland. It just got more expensive for the parent to borrow to fund those enterprises.
Likewise, Beijing Automotive Group is a nationally-owned car giant that has its reputation tainted by proximity to the state. Although it is state-owned, its BAIC Motor (BCCMY) unit is listed.
It makes its own Beijing, Foton and Changhe brands but also has joint ventures with HyundaiMotor (HYMTF) , Daimler (DDAIY) subsidiary Mercedes-Benz and Suzuki (SZKMY) . Oh, and for good measure, it bought the intellectual property behind some of Saab's brands, then part of General Motors (GM) - Get General Motors Company (GM) Report , so it can deploy that in China.
The Communist Party has its fingers heavily poked into the mining industry as well, so coal producer China Shenhua Energy (CSUAY) took a hit. On the plus side for Shenhua, reforms in coal production have probably gone further than any other industry, as I explained yesterday, meaning survivors should now be in good shape.
Key among the industries that have worsening trustworthiness when it comes to borrowing, at least according to Moody's, are the heavily regulated, monopolistic industries such as electric utilities.
The China Three Gorges Corporation and the State Grid fell down a notch on their bonds. But although they offer debt to international investors, their ownership remains closely held and closely guarded by Beijing.
Only oil and gas prospector and producer Kunlun Energy (KLYCY) has its shares listed overseas, among the six utilities that saw their international debt downgraded. It's off the electricity grid and therefore not quite the security risk that the other companies present.
The general contractor Shanghai Construction Group SH:600170 also suffered as another of the companies that fell under the Moody's microscope. It's the only one of the public companies above that doesn't have a U.S. listing.
Toll roads and train and subway operators also offer international debt, but don't dare offer foreign shares. The rail systems in Guangzhou and Tianjin now find it harder to borrow. Two companies set up to oversee free-trade zones in Tianjin, just outside Beijing, were also taken down a notch.
A major reason that Moody's expects China's financial strength to erode in the coming years is the glacial pace of reform at China's state-owned enterprises. Only a handful have implemented true "mixed ownership," bringing in private-sector investors alongside the government.
It's hard to see Beijing freeing up the ownership of the production or distribution of electricity anytime soon. Running a toll road or a subway system doesn't seem to present quite the same risk to me. So reform may see those entities listed in the end. Then they'll stand on their own feet to a greater degree -- and find their borrowing less linked to Beijing.
This article originally appeared at 10:00 ET on Real Money, our premium site for active traders. Click here to get great columns like this from Jim Cramer and other writers even earlier in the trading day.
At the time of publication, Alex McMillan had no positions in the stocks mentioned.