China's economic growth will accelerate to 7% in 2021 from a projected 2.2% expansion in 2020, driven largely by the public sector, whose debt burden is expected to rise significantly and serve as credit negative for the sovereign, according to a report from Moody's Investors Service.

Moody's expects the Chinese economy to expand at a faster rate than most Aaa- and A-rated sovereigns through 2024. As a result of the coronavirus-related stimulus and significant infrastructure spending aimed at boosting growth, China's general government debt is forecast to peak at about 45% of GDP by 2024, from an estimated 39% and 43% in 2019 and 2020, respectively.

Including governments and state-owned enterprises, public sector debt is expected to rise to 185%-190% of GDP in 2020-2021, from 167% in 2019, according to Moody's.

"The effectiveness of government policy in mitigating the risks from higher public sector debt, especially in a slower growth potential environment, will shape the sovereign's credit profile," the rating agency said.

Over the medium term, Moody's expects China to maintain its focus on further deleveraging and allotting investment to more productive areas as the government's policy emphasis shifts toward supporting employment.

"But capacity to achieve this as potential growth slows will be tested, with leverage in the public sector and the broader economy rising significantly, keeping contingent liabilities, particularly at local state-owned enterprises, as a key source of risk for the sovereign," said Martin Petch, senior credit officer at Moody's.