As a model system for hydrogen storage, magnesium hydride exhibits high hydrogen storage density, yet its practical usage is hindered by necessarily high temperatures and slow kinetics for hydrogenation dehydrogenation cycling. Decreasing particle size has been proposed to simultaneously improve the kinetics and decrease the sorption enthalpies. However, the associated increase in surface reactivity due to increased active surface area makes the material more susceptible to surface oxidation or other side reactions, which would hinder the overall hydrogenation dehydrogenation process and diminish the capacity. Previous work has shown that the chemical stability of Mg nanoparticles can be greatly enhanced by using reduced graphene oxide as a protecting agent. Although no bulklike crystalline MgO layer has been clearly identified in this graphene-encapsulated/Mg nanocomposite, we propose that an atomically thin layer of honeycomb suboxide exists, based on first-principles interpretation of Mg K-edge X-ray absorption spectra. Density functional theory calculations reveal that in contrast to conventional expectations for thick oxides this interfacial oxidation layer permits H-2 dissociation to the same degree as pristine Mg metal with the added benefit of enhancing the binding between reduced graphene oxide and the Mg nanoparticle, contributing to improved mechanical and chemical stability of the functioning nanocomposite.