Chinese stocks have reached their highest levels in two years, with gains of 16% to 20% since late September. This surge is driven by optimism about potential government stimulus measures.

The recent rally in Chinese stocks seems to be losing steam due to mixed economic signals and uncertainty about the timing and scale of fiscal initiatives. UBS analysts maintain an Overweight rating on local stocks, suggesting that while valuations have increased, there is still potential for further gains.

The Ministry of Finance has announced fiscal measures, such as increased debt issuance and support for provincial governments, to boost the economy and provide relief to the property market. However, the lack of details on personal consumption incentives and the overall implementation of these measures has tempered investor sentiment. UBS also noted a correlation between the recent rally in Chinese stocks and significant capital outflows from India, indicating a potential shift in market sentiment among emerging markets.