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Chinese stocks: Time to take profit?

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After a four-month rally, it's time to take some money off the table in China's market, Nomura said, turning more cautious before the Party Congress in November.

"The third Plenum of the 18th Party Congress may indeed surprise the market positively on medium-term structural fixes, but it may offer little short-term growth upside," it said in a note. China's Communist Party leaders will hold the third plenary session in November to set the country's economic agenda.

"The medium-term fixes to a few intertwined issues (local government financing vehicles, bank nonperforming loans, property/land prices and corruption) may bring upon unease in the capital market before things settle and improve," the bank said.

(Read more: China leader promises 'unprecedented' reforms)

The Shanghai Composite is up around 8 percent since the end of June, outperforming many regional counterparts, which suffered a bout of volatility over the period as funds flowed out of the region amid concerns the U.S. Federal Reserve would beging to taper its asset purchases and constrain liquidity.

Nomura expects the plenum is likely to disappoint the market on three key areas: the one-child policy, land reforms and urbanization. "Big changes in [these] areas may add to short-term macro growth at the expense of medium-term social and political viability," it said.

Local media has reported in recent months that Beijing may revise the unpopular one-child policy either later this year or early next year, possibly allowing a second child if only one of the parents is an only child, compared with the current requirement for both parents to be only children.

China's economic overhaul depends on moving millions of rural Chinese into towns and cities, but it requires overhauling land and household registration policies making many reluctant to move.

The bank raised the cash portion of its model China portfolio to 10 percent from zero. It removed Anhui Conch, ICBC, China Shenhua, China Southern Airlines and China Communications Services from its model portfolio. Its additions are Baosteel, Datang International, Huaneng Renewable and Sunny Optical.

(Read more: China stock rally's easy pickings may be over)

"This move is aimed at locking in some gains and raising cash so that we can put the cash to use when the index trades lower/sideways in coming months." Nomura expects long-term value-focused funds will step in to buy the dips and set a floor for Chinese equities.

Others also see reasons to tap the brakes on China bullishness. In a report titled "Curb Your Enthusiasm," Credit Suisse said "renewed enthusiasm from both the buy- and the sell-side has gone too far." It cited data indicating hedge funds have recently increased net long positions in China, while net buy recommendations from the "sell side" are well above average.

While it noted China has seen a bounce in economic growth, with third-quarter gross domestic product rising 9.1 percent in annualized terms, it doesn't expect growth to accelerate any further from here and other indicators, such as money creation, paint a more negative picture.

(Read more: China's home price rises don't tell the whole story)

The bank also cites continuing structural concerns, such a credit bubble, worries on the real-estate sector and investment.

"In the near term, Chinese macro surprises appear to have peaked, and suggest that relative earnings momentum is set to weaken," Credit Suisse said. "We remain concerned about excess capacity leading to falling producer prices and falling profits. We note that within a global context, China has the lowest non-financial margins."

By CNBC's Leslie Shaffer. Follow her on Twitter: @LeslieShaffer1

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