Although US politics takes much of the limelight, Coutts urges clients and investors to keep an eye on China's own, rather less public, battles for political office.

Investors could hit Chinese shares if there are concerns that hardliners win ground this week in the ruling Communist Party leadership, Coutts, the private bank, warned in a note to clients.

“The one caveat to our positive view on China is the pending People’s Congress due to start on 8 November,” the bank said in its Global View From Asia report.

With many investors concentrating on the US presidential race between Mitt Romney and Barack Obama this week, the bank pointed out that the tussles within China’s regime governing 1.3 billion people are arguably as important in economic terms.

“At this juncture the outcomes of both the US presidential election and the Chinese Party Congress are too close to call,” it said.

“There are mutterings in some quarters that the hardliners [in China] may be in the ascendency, potentially holding the majority in the new seven-man politburo. Given that it is foreign investors who have largely driven the recent rally, any suggestion that the pro-reform element of the party is being overwhelmed by hardliners could see some aggressive profit-taking despite the positive economic news,” Coutts said.  

The political elite is gathering in Beijing to confirm Xi Jinping as chairman of the party. He will be heading an inner circle of nine, or possibly fewer, party bosses – all men - who intend to run China for the next decade. Among the sensitive issues for policymakers is China’s current managed exchange rate regime against the dollar, a topic that has prompted US presidential candidate Mitt Romney to call for trade measures against China. Another topic is corruption and the exodus of money to jurisdictions such as Macao.

China’s famed red-hot economic growth rate and market performance has hit some headwinds of late, prompting global concerns on whether the country can continue to act as one of the big drivers of international growth. However, recent data suggests the Asian giant is recovering, Coutts said.

For example, the performance of the domestic A-share market, which has lagged the H-share sector, has shown signs of life, it said. “Since mid-September, the H-share market has outperformed the A-share market by ten percentage points [but] in the last week they moved in tandem up around 2 per cent,” the bank said.

Markets have been buoyed by improved industrial confidence reports and stronger consumption (Hong Kong’s retail sales volumes rose 8.5 per cent year-on-year), it said.

“The positive view of Chinese equities is reinforced by the solid flow of mutual fund money going into the market,” the bank added.

Schroders, the UK-based investment and private banking house, recently urged investors not to be overly concerned regarding outflows of funds from China.