Asia stocks go one way, China sure to go the other

An investor watches the electronic board at a stock exchange hall in Shanghai, China.
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Once again China's stock market is moving in the opposite direction to its Asian peers.

The benchmark rose more than 3 percent in the past month, making it the best performing major stock market in the region. In contrast, the broader MSCI index of pan-Asia Pacific stocks fell about 1.4 percent.

This inverse relationship was also observed in the first half of the year, when Chinese stocks fell around 14 percent amid worries about slowing economic growth in China, while broader Asian stocks rallied roughly 1.25 percent.

One-month performance

"China's stock market definitely beats to its own drum," said Chris Weston, chief markets strategist at trading firm IG.

"A large percentage of the players on the Shanghai Composite are retail investors, so the market is impacted more by sentiment than some of the bigger markets like the S&P 500 and that means that they tend to look at their own domestic conditions over other external situations," he added.

In short, improved optimism about China's economy, the world's second biggest, is driving Chinese shares higher at a time when worries about a tapering of the Federal Reserve's monetary stimulus are pushing other markets lower.

(Read more: Emerging Asia rout start of a multi-year bear market?)

The Shanghai Composite was trading at 2,126 points on Thursday, little changed on the day, but up about 4 percent for the year.

In recent weeks, Chinese economic data has surprised to the upside, fueling hopes that the economy may have bottomed out. Among such indicators, the official purchasing managers' index of activity in the manufacturing sector rose to a 16-month high of 51.0 in August.

Pleasant earnings surprises out of China: Pro
Pleasant earnings surprises out of China: Pro

Sentiment change?

"I'm feeling less bad about China," Ajay Kapur, head of Asia-Pacific and emerging markets strategy, Bank of America Merrill Lynch, told CNBC Asia's "Squawk Box." "If you look at the data it has surprised positively and I think economists will start to revise their growth forecasts higher."

In fact, some banks have done so already; Goldman Sachs recently raised its full-year estimate for China's gross domestic product to 7.6 percent from 7.4 percent.

(Read more: Goldman upgrades China growth, cuts India outlook)

While there were concerns about the risks facing China's banking system, analysts said these worries were largely priced into the stock market.

(Read more: China PMIs impress but analysts warn of risks ahead)

"In China, they are taking action before a crisis occurs and that sets the path for a bull market in Chinese equities from a very low level of valuation," Kerry Series, founder and CIO at Eight Investment Partners, told CNBC, referring to the problems in the banking sector.

The Shanghai Composite is trading at a price-to-earnings ratio of about 10.2 compared with Japan's , which is trading at almost 20 times, and the Australian stock market's 16.8.

"China is not out of the woods yet, but we are seeing enough certainty from the data, enough certainty from the global economy that investors are starting to buy cheap valuations," said IG's Weston.

—By CNBC.Com's Dhara Ranasinghe; Follow her on Twitter @DharaCNBC