The World Bank (WB) raised its forecast for China's GDP growth this year from 9.6 to 10.4 percent, warning the widening trade surplus which requires measures to address excessive liquidity remains a key economic issue.

WB analysts said the adjustment was made as China's policy stance seemed to be "less tight than expected" with its export prospects improved.

China's economic growth continued to be powered by the traditional engines of external trade and investment, said the quarterly report on China's economy released by WB on Wednesday.

China's GDP grew by 11.1 percent in the first quarter, 0.7 percentage points higher than the same period last year.

But the report said the economy did not appear overheated from the macroeconomic perspective, with overall demand and supply growing in line with each other and non-food consumer price inflation still around one percent.

"Macro policies to tighten overall demand are therefore not obvious," said Louis Kuijs, senior economist with the WB and the main author of the report.

However, the government was under tremendous pressure from the widening trade surplus which was driven by overseas, rather than domestic, demand to address the excessive liquidity brought about by the surplus, said Kuijs.

The major challenge was rebalancing the economy to shift industrial production to services, become more reliant on domestic demand, and achieve environmentally sustainable growth.

The report warned a negative correction in China's stock markets may damage confidence in the Chinese capital market.

Goldman Sachs, the U.S.-based investment bank, earlier raised its forecast for China's 2007 gross domestic product from 9.8 percent to 10.8 percent after the country saw robust economic growth in the first three months.

Editor: Yan