CHINA has made it plain to the world that any loan made to a Chinese entity, state-owned or not, is only backed by sovereign guarantees if guarantees have been specifically issued. In other words, if misguided foreign banks assume Beijing is going to bail out companies caught in the triangular debt trap then they are wrong. Yet China finds it surprising that the credit ratings of major banks, including the Bank of China, were this week down-graded from A3 to Baa1 by credit rating service Moody's. It shouldn't be. The significance of this is not just in terms of the extra costs of borrowing but from an investment perspective it tells us about risk. Historically, the average cumulative default rate is only 5.2 per cent on A-rated bonds in 20 years. For Baa-rated paper, the figure is almost 11.7 per cent, according to Moody's. That is more than 100 per cent worse as a lending risk. Mind you, Moody's say the same figure for Aaa rated paper is 2.6 per cent. So much for the safety of super secure credit ratings. A default, in Moody's terms, means a delay in repayment of interest or principle - it does not mean the whole institution exploded like BCCI. Given the huge impact of a downgraded rating from Moody's, many people might be forgiven for wondering: 'How come Moody's has so much clout if even bonds they say are safe as houses fall apart?' Good question, Hindsight replies. We might even have wondered ourselves. Moody's does not have a monopoly on bright credit analysts. So why do banks with credit control systems of their own place so much trust in Moody's and its main competitor, Standard & Poor's? Moody's and S & P are paid by their customers rather than by those who they rate. This way the two have a big incentive to get it right and not merely please punters. As for China's problem, the downgrade is very much a symptom of the larger paradox which China has yet to resolve. Many of the creaking arms of the state must be bankrupted but until there is some way of looking after the workers employed by the monoliths, they must be kept afloat - if possible with gweilo money rather than patriotic, historically-aware yuan taxes. The problem is getting worse all the time. Especially with supposedly professionally run companies complaining that China's growth is too slow because of austerity measures. This week saw another slew of companies blaming China's austerity measures for bad results with the biggest example being Kunming Machine Tool, where net profits plunged 64 per cent. Kunming fell into a swelling inventory trap. Other companies had other problems. Take Ultronics International - the firm's shares, once a market darling, crashed 20 per cent after announcing net profits of $5.4 million, more than 80 per cent down on the previous year. With economic growth in China down to a drastic 11 per cent, it is no wonder some firms are feeling the pinch. Judging by Ultronics' less than detailed report to its owners, the cement factory, which it decided last year would fit well with existing medical equipment and its scientific instrument businesses, is not making money. Indeed, Ultronics' 45 per cent share of the loss seems to be $820,000. The company thinks that it will produce a steady income 'in the long term'. Why? If a cement plant is losing money hand over fist now, how much can really be done to turn it round? Cement making is not exactly a hi-tech business where corporate whizz-kids fresh from business school go to prove they've really got the right stuff in a fast changing market. The performance of Hong Kong firms in the slightest chill wind from the North goes a long way to explaining why no Hong Kong company ever makes money anywhere outside Hong Kong. The much vaunted business genius of the territory is a myth caused by a labour market which favoured manufacturers in the 1950s and 1960s and a property market which has done the rest. The examples of this are all around. Look at Hutchison Whampoa. Its British telecommunications ventures have been disastrous so far and Orange, its latest venture, is still far from in the money. Husky Oil, Hutchison's other attempt at globalisation, has been even worse. Aside from austerity measures, the other big problem for Hong Kong firms is competition. If real free competition is allowed to impinge on the market then how those tycoons whine. Ian Wilson, chief chappie at Standard Chartered Bank here, was guilty of this Hong Kong sin on Monday. He had all kinds of dire warnings about what would happen if we deregulated the interest-rate environment. As Hindsight understands his arguments, the chaps in the blue suits will become so frenzied with competition they will send the Hong Kong financial system into a tail-spin. Yet at the same time we are supposed to believe these guys when they offer us their expert financial advice? Strangely, every other kind of business in the world can manage to handle open, free and fair competition without dropping rates to uncompetitiveness. Maybe there is something in the water here. Also falling in this bag of badness is Cathay Pacific. Or rather not, because it isn't Cathay that is zapping Australian airline's fifth freedom rights but the government. The airline has its own problems with declining profit, rising costs and a constant fight to ensure profitability is not hit by adverse movements in currencies. The row is all about how many people airlines can pick up outside their base country and take to another place outside their base country. All that rubbish about the loveliness of the flight attendants and the taste of the food is to hide the real horror of cattle class seating and surly service. The government has put limits on the number of passengers Qantas can pick up in Hong Kong. This has led to tit-for-tat action by Australia, which points out how well Cathay does out of fifth freedom rights. As usual, the people who suffer most are consumers.