BEIJING -- Morgan Stanley upgraded its forecasts for China's 2007 GDP growth from 9.3 percent to 10.5 percent and consumer price index (CPI) inflation from 2.5 percent to 2.9 percent.

A Morgan Stanley research paper that reached here Wednesday said the forecasts readjustment was made on China's stronger-than-expected developments in the first five months of the year and a more favorable external environment going forward.

The research also raised the 2008 GDP forecasts from 8.5 percent to 10 percent, stressing this is despite the upcoming round of macroeconomic tightening.

The paper said the latest data through May indicate very buoyant activity in almost every aspect of the economy, including fixed-asset investment, retail sales, external trade, and industrial production.

"The Chinese authorities appear poised to initiate a new round of macroeconomic tightening to guard against the risk of a generalized economic overheating," the paper said.

China recorded a 10.7 percent GDP growth in 2006 and an 11.1 percent growth for the first quarter of this year.