The reason the grounded entrance conductor can be smaller is because on 220 V circuits like a water heater or AC or Electric range the current does not flow back through the neutral as it is flowing from one hot leg to the other. It requires a bit of calculation but it is permited.
Size the Neutral Conductor: 220.22
310-15(B)(6) states that the neutral service and/or feeder conductor can be smaller than the ungrounded (hot) conductors, provided the requirements of 215.2, 220.22 and 230.42 are met. 250.24(B)(1) states that the neutral cannot be smaller than the required grounding electrode conductor specified in Table 250.66
SERVICE-ENTRANCE CONDUCTORS shall be copper or aluminum. Aluminum is not recommended. The minimum size “hot” conductors shall be # 6 except when the service is for any dwelling the minimum size shall be # 4. The consumer shall be responsible for determining whether larger conductors are required based upon load requirements. The NEUTRAL conductor shall be the same size as the “hot” conductors or a maximum of two standard size smaller. No conductor shall be smaller than # 6. The ampacity of all conductors shall be per the National Electrical Code. See the Conductor Chart for minimum size “hot” conductors. Each conductor shall extend a minimum of 36" out from the weatherhead.