Friday, October 30, 2009


In November 2007 we wrote an article entitled “Surreality Check… Dead Men Walking”, in which we discussed the early warning signs of the impending credit crisis and highlighted companies that were looking particularly troubled to us at the time.

We identified General Motors with a book value of negative $74 per share that boasted a market cap of $15 billion. (Ask your friendly neighborhood Chartered Financial Analyst to explain that one to you). Two years later? Following a $50 billion government injection, GM declared bankruptcy on June 1, 2009 and reemerged on July 10, 2009 with new owners consisting of: the US Treasury (60.8%), the Crown in Right of Canada (11.7%), previous GM bondholders (10%) and the UAW Health Care Trust (17.5%). GM stock went to zero.

We identified Fannie Mae, which, at the time, had a market cap of $40 billion and owned/guaranteed $2.7 trillion of mortgages - or about a quarter of all residential mortgages in the United States at the time. Fannie’s leverage ratio was a sobering 67:1. Two years later? Fannie Mae and Freddie Mac have both been nationalized. On September 7th, 2009, the US Treasury announced the two mortgage giants were being placed into a conservatorship run by the FHFA and pledged up to $200 billion each to back their crumbling balance sheets.
We highlighted Citigroup as a candidate for collapse under the weight of its subprime portfolio. One year later? $25 billion from the TARP program, a massive US government guarantee on $306 billion in residential and commercial loans and a cash injection of $27 billion into Citigroup for preferred shares. It was a de facto nationalization.

Why the walk down memory lane? The equity market performance in November 2007 masked the underlying problems plaguing the financial system at the time, and it’s blindingly apparent that it is doing the same again today. The government has assumed most of the financial system’s liabilities in a giant game of ‘kick the can’. The calls for a new bull market are coming fast and furious. Market participants are bidding up the stocks of companies that are demonstrably bankrupt, and government balance sheets have ballooned to unforeseen levels. As respected market commentator David Rosenberg recently wrote, “the stock market is divorced from economic reality”.1 It’s time for another surreality check, but this time it isn’t the publicly traded companies that deserve attention, it’s the governments that have saved them. Make no mistake – the dead men are still walking – they’re just a lot bigger now than they were two years ago, and they don’t generate earnings – they print money and tax their citizens.


In case you failed to catch it in our previous articles this year, we thought we’d state it outright for our readers this month: the United States Government is on a trajectory to default on their obligations. In its current financial condition, it will not be able to fund its forecasted budget deficits and unfunded Social Security and Medicare promises on top of its current debt obligations. This isn’t official yet, and we don’t know when the market will react to it, but there is no longer any doubt about the extent of their trajectory. There simply isn’t enough taxing power, value creation or outside capital willing to support its egregious spending.

Stating the obvious may be construed by some as fear mongering, ‘talking up our book’ or worse, but our view is not as severe as you might think. In the Federal Reserve Bank of St. Louis’ Review from July/August 2006, Lawrence Kotlikoff stated that “partial-equilibrium analysis strongly suggests that the U.S. government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds.” 2 He went on to suggest that the US should immediately close the Social Security program to reduce future liabilities (could you imagine?), use a voucher system for Medicare to limit costs, and replace personal, corporate, payroll and estate taxes with a single federal sales tax. All this, published in an article from 2006, well before the credit crisis and subsequent meltdown had even begun!

Three years later, the financial condition of the US government is completely untenable. The projected US deficit from 2009 to 2019 is now slated to be almost $9 trillion dollars.3 How on earth does anyone expect them to raise this capital? As we stated in a previous article, in order to satisfy US capital requirements, all existing investors would have had to increase their US bond purchases by 200% in fiscal 2009. Foreigners, however, only increased their purchases by a mere 28% from September 2008 to July 2009 - far short of what the US government required.4 The US taxpayer can’t cover the difference either. According to recent estimates, tax revenue from all sources would have to increase by 61% in order to balance the 2010 fiscal budget. Given that State government income tax revenues were down 27.5% in the second quarter, the US government will be lucky just to maintain its current level of tax revenue, let alone increase it.5

The bottom line is that there is serious cause for concern here – and don’t be fooled into thinking
this crisis will fix itself when (and if) the economy recovers. Just how bad is it? Below we outline the obligations of the US Federal Government from 2004 to 2009. We present two sets of numbers, as government accounting can vary widely depending upon the source. In column A, we outline the Total US government Obligations, using actuarial reports from the Social Security Administration and the Medicare Trustees Reports. In column B we identify Total Federal obligations according to GAAP accounting provided by Shadow Government Statistics, calculated on a US fiscal year end basis with estimates for 2009. The differences in the absolute amount of total obligations ($114.7 trillion vs. $74.6 trillion in 2009) are a function of timing, the calculation timeline for Social Security and Medicare, and other obligations included under GAAP rules. Either way we choose to calculate it, the total number is preposterously large. From 2004 to 2009, US unfunded obligations increased by an average of almost 50% over this six year period under both calculation methods, while US government revenue increased by only 12%.6 No company or government can increase its liabilities by more than four times the rate of its revenue and stay solvent for an extended period of time. And as the numbers imply, the hole that the US government is digging is getting deeper by the minute. On a GAAP basis, US government unfunded obligations increased by more than $9 trillion from last year alone! That represents ten years of projected deficits added in a mere twelve months. How can this be happening? The numbers are surreal, and we must ask ourselves how much longer the world will continue to support this spending frenzy.

The Federal Deposit Insurance Corp. is another major problem for the US. The FDIC’s Deposit
Insurance Fund, which had $10.4 billion at the end of June, has spent so much covering bank failures over the last three months that it is now completely out of money. This means there is no capital set aside to insure the $4.8 trillion of deposits and $320 billion worth of FDIC-guaranteed debt that US banks and other financial companies have issued. The real shocker that we discovered some time ago is that the FDIC ‘funds’ were never even held in a segregated bank account – the fees collected from the banks are accounted for as a part of the government’s general revenues that go towards military spending, bailouts, interest costs and other government programs. The FDIC ‘fund’ merely consisted of IOU’s from the general revenues accounts. And now that the Deposit Insurance Fund balance as of September 30, 2009 is negative13 the FDIC wants the institutions to prepay their assessments for all of 2010, 2011 and 2012. In effect, the FDIC wants to borrow money from the banks it provides insurance for. Does this not strike you as surreal? Why would anyone have any confidence in anything the FDIC guarantees?

To see the full report: UNITED STATES MARKETS

>Pause, Rewind, Replay (MORGAN STANLEY)

Key Debate: Are Indian equities set up for a significant correction?
The market is up 100% since its low in March 2009, and is now up 92% over the trailing 12-months. Reported earnings growth is still tepid and reforms are moving slower than expected by certain quarters. The central bank has been sending signals on a possible exit policy and at the same time equity supply is burgeoning. Crude oil prices are threatening to move higher with negative consequences on India’s macro whereas relative valuations do not seem attractive anymore. India is among the top 5 performing markets globally this year, and it would seem a lot of the good news and more is in the price. Does all of this mean that Indian equities are set for a significant correction?

Indian equities in a sweet spot, but…
We reckon that Indian equities are in a sweet spot with low institutional ownership (coming off five-year lows), strong liquidity (policy makers are still reticent to take away stimulus), prospects of growth (watch out for private corporate capex – the trough is likely behind us), earnings upgrade (indeed, we are at the start of earnings growth cycle), strong corporate balance sheets, and stable politics (implying steady pace of reforms).

…the pace of gains is likely to slow
Our Dec-2010 target for the Sensex (19,400) suggests upside of 19%, reflecting a slower pace of gains after a stellar performance over the past six months. Our prognosis is that Indian equities could be volatile in the near term, since a lot of the next six months’ projected growth is already
in the price. We believe that investors should use such volatility to buy Indian shares, since the growth outlook for the next 12-18 months remains firm and is still not priced into equities. Heightened volatility could make trading a less-rewarding strategy compared to “buy on dips and hold”. Our bull-case scenario takes the Sensex well past its previous high, whereas our bear case could lead it to test the post-election result close of May 18.

Key factors to watch
Key factors that could determine market behavior include government policies (watch out for infrastructure spending), global markets (correlation with SPX and China is still high), crude oil prices (a sharp spike creates problems, the risks are lower if a crude oil price rise is accompanied by strong capital flows), long bond yields (reflecting fiscal position), the RBI’s exit policy (and hence liquidity), sentiment indicators (watch market breadth and momentum, which suggests weak share prices in the offing), equity supply (the market may not tolerate more than US$20-25bn in the coming year), and valuations (relative valuations have moved above average levels).

Portfolio position: Continue to prefer cyclicals over defensives
We believe that consumer and infrastructure sectors will drive growth recovery and, hence, market performance. Accordingly, we are overweight Consumer Discretionary, Industrials, Financials, and Energy in our model portfolio. We expect the broad market to outperform the narrow market.

Key Investment Debates

Macro forecasts: Politics are in good shape, and that should allow a reasonable policy momentum. The government is already moving forward with significant tax reforms, and our belief is that infrastructure spending should pick up pace in the coming 12 months, especially in electricity and roads. We are forecasting GDP growth of 6.4% and 8% in F2010 and F2011, respectively, ahead of the consensus. More important, for the market, industrial growth is likely to accelerate over the coming 12 months. Acceleration in industrial growth will likely close the output gap faster than current expectations. The supply-side factors, including the availability of capital and its cost, favor a trough in capex and a recovery in the coming 12 months. We don’t believe this is still in the price.

Earnings growth: We have been raising our earnings growth forecasts just like the bottom-up consensus. We are now looking for 15% and 23% growth for the BSE Sensex constituents on aggregate in F2010 and F2011, respectively, compared with 5% and 20% by the consensus.
Revenue growth seems to have bottomed out given our view that industrial growth is likely to recover sharply in the coming months. The strength of the recovery could bear upside depending on execution of policy reforms. The corporate sector seems to have cut costs and thus margins have improved sharply. The macro environment (i.e., higher consumer price inflation vs. wholesale price inflation after adjusting for food prices) favors a robust rebound in margins in the coming four quarters. We think these three factors have set us up for strong earnings growth over the next 12 months. It is quite likely that broad market earnings growth will accelerate faster than the narrow market, as we saw in the previous cycle. We expect broad market earnings growth to average 20% and 25% in F2010 and F2011, respectively

Valuations: The market’s valuations do not appear attractive to us, although they are also not stretched. The prospects of earnings upgrades means that valuations could turn out to be attractive in hindsight. On our estimates, the Sensex is trading at 16.3x and 13x F2010 and F2011 earnings, respectively. The 12-month forward P/E for the MSCI Index is at a 29% premium to the emerging market multiple, making India the fourth-most expensive EM. At a 10-year bond yield of 7.4%, investors are realizing a risk premium of 6.4%, which suggests that the market is attractive for long-term returns. At the same time, the absolute P/E and P/B are 95% and 73%, respectively, off their all-time lows.

Ownership, cash levels, equity supply and liquidity: FII ownership is coming off a 5½ year low and is well off the peak. Mutual cash balances have reduced over the past three months, but still have substantial cash in their portfolios. In the meanwhile, the rising equity supply could cause
a problem for the market if it gets bunched up, as we saw recently. Excess liquidity in the system could be more than US$32 billion. Market behavior in the previous two tightening cycles has been mixed, and hence is inconclusive.

Sentiment: The market can no longer rely on depressed sentiment as a guide to better returns, in our view. Sentiment has turned up sharply over the past three months, and our market timing indicator is no longer in a buy zone. Some components of our proprietary composite sentiment indicator, notably, momentum metrics and volatility measures, suggest that the market could sell off. We think market participants should keep eye on breadth and trading turnover.

To see the full report: INDIA STRATEGY


SUBEX Ltd has offered its bondholders an exchange offer, whereby new bonds will be issued at a 30% discount to the face value. Assuming investors accept the new terms, the principal amount outstanding on the bonds would come down to $126 million. Bondholders will be compensated via an increase in the interest coupon, from 2% for the existing bonds to 5% for the new bonds. More importantly, the conversion price has been set at Rs. 80.31, a fraction of the original
conversion price. The details of the new bonds are based on announcements by the company to London Stock Exchange, where the bonds are listed. According to a LSE filing, due to the lower conversion price, “the new bonds are more likely to be converted into shares of the company, and thereby further reduce the debt obligations of the company when the new bonds fall due for redemption”. From a bondholder’s perspective, the new terms make immense sense. But from the perspective of Subex’s existing shareholders, the conversion of bonds into shares will lead to
a trebling of the company’s equity base from the current level of 34.8 million shares. If all the bonds are converted based on the new terms, 72.2 million new shares would have to be issued. For perspective, Subash Menon and his associates own 12.84% of the company currently. Upon full conversion of the new bonds, their holding will drop to around 4%. Of course, bondholders will convert the debt into equity only if the company’s performance picks up, and they have the
certainty that the share price is sustainable well above the conversion price of Rs. 80.31. Else, they’d just prefer not to convert and demand redemption instead. If that’s the outcome, Subex could be strapped for cash to pay its bondholders. Either way, the company needs to post a sharp rise in profit to avoid a debt trap.


2QFY10 performance boosted by construction earnings: During 2QFY10, GMR Infrastructure reported revenues of Rs12b (up 41% YoY), EBIDTA of Rs3.8b (up 53.8% YoY) and net profit after minority interest of Rs549m (down 50% YoY). Reported profits include several one-offs: 1) Rs95m of write-back of depreciation towards Vemagiri project, 2) Rs125m of prior period service tax charge in Hyderabad airport SPV. Adjusted for GMR's proportionate holding in SPVs, the net profit stands at Rs520m, down 41% YoY. GMR accounted for profit of Rs150m+ in 2QFY10 (v/s nil in 2QFY09) from Construction business division for executing Sabiha Gocken Airport (SGIA) at Turkey, through 50:50 JV with Limak.

Operating factors across projects improve in 2QFY10: During 2QFY10, GMR has witnessed momentum in terms of passenger traffic at both airport (DIAL: +20% YoY and HIAL: +8% YoY), most road projects under construction have entered operations phase and monthly annuity/toll collection stood at Rs305m (vs Rs116m in 2QFY09). PLF for power projects has also improved with Vemagiri operating at ~90% PLF for 2QFY10, Chennai Power at 73%.
Improvement in operating parameters is positive and could improve internal accruals in FY10 and FY11.

Business momentum picking up, growth to be equity dilutive: Over past six months, GMR Infrastructure has bagged 2 new road projects (cost of Rs33b), acquired 600MW power project from Emco, completed financial closure for 1.8GW power projects, and financial closure for ~2GW of capacity is expected in 2HFY10. DIAL has commenced re-bidding process for land monetization (15 acres) and lease is expected to be awarded by end January 2010. GMR's share of equity towards existing projects (excluding InterGen) stands at Rs47b and current cash on books stands at Rs16.6b. It has indicated plans to raise upto Rs75b in equity at SPVs/HOLDCO level over next 3 years.

Valuations and view: We expect GMR Infrastructure to report consolidated net profit of Rs4.8b in FY10E and Rs4.6b in FY11E. Our SOTP based target price stands at Rs54/sh. At the CMP of Rs67/sh, the stock trades at a PER of 51x FY10E and 53.4x FY11E and P/BV of 3.6x FY10E and 3.4x FY11E. Maintain Neutral.

To see the full report: GMR INFRASTRUCTURE

>India look for ways to strengthen climate talks hand

New Delhi - India may be preparing for long-running climate change talks that go well beyond the Copenhagen Summit in December, as it is starting to enter long term regional and bilateral pacts which will reinforce its negotiating firepower when it faces western nations.

While keeping an optimistic face on the prospect of a convincing roadmap for the future being hammered out at the U.N. Copenhagen meeting, India looks to be on a two-track journey, one path of which has emerged from the possibility no substantive multilateral deals are struck in Denmark.

Last week it signed a five-year pact with China--another country accused of paying scant respect to the environment in its pursuit of growth--under which they will among other things formalize exchanges of view on international climate change negotiations.

That agreement stresses that the U.N. framework convention on climate change and its Kyoto Protocol are the most appropriate vehicles for addressing climate change.

Also last week, China harshly criticized the EU and Japan for trying to drop the Kyoto Protocol as the basis for a climate deal, warning the Dec. 7-18 Copenhagen summit would fail if they didn't recant.

The Kyoto agreement specifically excludes developing countries for having to make binding cuts to their venting of greenhouse gases, something both India and China insist is enshrined in Copenhagen deals.

The Indian government says India's per capita greenhouse gas emissions are 1.1 tons a year, compared to 20 tons in the U.S. and 10 tons in the EU.

China, too, consistently argues that Western nations should shoulder the major burden of climate change efforts due to their higher per capita emissions and earlier industrialization.

China's latest stance is to say it will impose domestic targets for reducing its carbon intensity--the volume of carbon dioxide emissions per unit of gross domestic product--but so far it hasn't come up with any figures.

If and when a joint China-India stance on carbon intensity levels will emerge remains to be seen.

"Regional and cross regional deals to address climate and promote particular clean energy objectives will be an important aspect of a global decarbonization move," said John Topping, president of the Washington-based Climate Institute.

"The recent joint declaration between India and China leads to collaboration on clean energy development, and investment it can be a forerunner of some very important moves on the way to a greenhouse benign economy," he said.

It's not only with China that India has forged an alliance to ensure talk with one voice at Copenhagen.

India also recently said it had a united front with its neighbors in South Asia, an area particularly vulnerable to climate change, and one holding about 20% of the global population.

India environment minister Jairam Ramesh, speaking after a meeting of South Asian Association for Regional Cooperation, or SAARC, environment ministers, said that the grouping agreed it should not deviate from the Kyoto Protocol or the Bali Action Plan on climate change.

Such agreements at regional level, Topping feels, could help India go a long way.

"It is an internationally accepted norm to form various blocks to drive home your point at a global forum," a member of India's negotiating panel for Copenhagen said, on condition of not being named.


>Strong rand puts pressure on platinum producers

Johannesburg - Platinum miners' balance sheets are under strain as the South African rand strengthens, offsetting a strong recovery in metals prices from last year's lows.

Investors, however, either haven't taken notice or are betting that as the world economy recovers, demand for platinum group metals will again outstrip supply, propelling prices even higher and ultimately boosting the profitability of the companies that dig the metal out of the ground.

"If you look at the platinum price in rand terms, it has moved relatively little over the course of this year. And that is placing pressure on the industry as a whole," Ian Farmer, chief executive of Lonmin PLC (LMI.LN), the world's third-largest platinum producer, told Dow Jones Newswires.

"A large part of the industry is not making a great deal of money right now," Farmer said.

Platinum production is concentrated in South Africa, which accounts for about three-quarters of the world's supply of the metal. That means that while revenue from platinum sales is in U.S. dollars, the bulk of expenses--such as labor and power--are in rand.

A stronger rand erodes gains from platinum prices. In the year to date, platinum is up 41% to about $1,326 a troy ounce while the rand has gained about 23%.

The parallel is even more pronounced when looking at all platinum group metals--a mix that includes platinum, palladium and rhodium--compared with the rand.

Lonmin's average basket price for the group was $918/oz in the three months to Sept. 30, the last quarter of the company's financial year, a 22% increase compared with the last three months of 2008, its first quarter. At the same time, the company saw the rand strengthen 22% against the dollar.

Shares in platinum producers, meanwhile, have risen in lockstep with the dollar price of the metal, potentially setting investors up for a correction, some analysts say.

"We think the market has not yet realized that all the recent increases in dollar-denominated PGM [platinum group metals] prices have been offset by a stronger rand. We expect PGM stocks to fall, led by Anglo Platinum and Lonmin as the market realizes this," Nomura analyst Abhishek Shukla in London said.

The share prices of Anglo Platinum Ltd. (AMS.JO) and Impala Platinum Holdings Ltd. (IMP.JO), the world's largest platinum producers, are up about 30% so far this year. Lonmin is up about 74%.

"I can't see earnings justifying the share prices," said Peter Major, an analyst at fund management and broking firm Cadiz in Cape Town. "The shares are being held up on expectations of earnings far down the road."

"The majority of the rise in the platinum dollar price so far this year has been offset by the rand strength in terms of the rand basket price that we receive," said Anna Poulter, head of investor relations at Angloplat. She said the company had no comment on the direction of its share price.

Major said the revenue of many platinum producers will have hardly budged as the rand has strengthened almost in parallel, and mining companies in South Africa are faced with cost increases of at least 15%. South Africa lifted electricity prices by an average 31% this year after a similarly sharp rise last year, while recent wage settlements have pushed pay up at least 9%.

But not everyone sees an inevitable downside to share prices.

"My view is the rand can't strengthen much more. And yet the potential for demand recovery and the fact that the platinum companies are struggling so severely to me actually paints quite a rosy picture of the future," said Catherine Raw, portfolio manager for Blackrock's natural resources equity team.

That all points to a relatively good share performance for platinum miners in the next six to nine months, she says. In the longer term, though, Raw warns that the industry faces structural challenges and it will be important to invest carefully in platinum companies; Blackrock sees Impala as best positioned to benefit from an expected rise in prices. "Our exposure is to Impala really ... it's one of our largest holdings across the mining sector."

Platinum, also used in a number of industrial processes and for jewelry, is a key ingredient for the auto industry. Auto makers account for almost half of global platinum demand, using the metal in exhaust systems in order to meet increasingly stringent emissions standards.

While auto sales have tumbled, the three major producers of platinum have been focusing on slashing costs, together shedding thousands of jobs and shutting down their highest-cost production. But they are boosting output at remaining operations and supplies aren't expected to take a big hit--Investec Securities forecasts supplies at 7.5 million ounces next year, compared with 6.8 million ounces this year.

That indicates miners are holding on for higher prices--something they expect to materialize in the coming months.

"There hasn't been a sort of grand announcement about major closures," Lonmin's Farmer said. "But I think we are starting to see early signs of demand recovery. We are expecting 2010 to be a year in which supply and demand are fairly much in balance, with price recovery in 2011."


>Jewelry demand to return despite higher gold prices

Singapore - Gold is in unchartered territory for the traditional consumer in the jewelry market, but many are facing up to the reality that higher prices are here to stay, with burgeoning investment demand making up for any a dip in jewelry demand this year.

That is forcing even traditional buyers back in to the market as they reluctantly accept elevated price levels. This shift in attitude could remove the last hurdle before gold can resume a rally that appears to have hit a roadblock now.

"I would not advise anyone to short this market," said Jeffrey Rhodes, CEO of INTL Commodities in Dubai.

Since breaking higher in mid-September, gold has confounded expectations by comfortably consolidating above $1,000 an ounce and analysts say they expect a gradual march higher in 2010, regardless of periodic corrections.

Despite the strength in prices this year, a rise in investment demand on inflation expectations and for currency diversification purposes, has more than offset the weakness in the jewelry sector with overall gold demand in the first half at 1,744 tons, compared with 1,520 tons in the first half of 2008, according to Gold Fields Mineral Services data.

The most worrying statistic for bulls has been the continued decline in Indian gold bullion imports which are expected to fall below 300 tons in 2009, down from 396 tons in 2008 and more than 700 tons in 2007.

However, India's gold sales during the festival period of Oct. 12-19 actually rose 5.7% from a year earlier to 56 tons despite near-record prices in rupee terms, the World Gold Council said Friday.

This may not immediately result in higher imports as scrap supply will ensure sufficient supply for now, but any dip in gold prices is likely to lead to renewed Indian imports, traders said.

"India's will be ready to buy if gold corrects. You might not see gold below $900 again," said Rhodes. India is the biggest importer of gold bullion.

Physical traders in Singapore also expect buying to pick up strongly on dips below $1,000, a level where buying dissipated in early 2008. "Indian buyers never buy into rallies. There is always a lag time before they will be comfortable with higher prices," said a Singapore-based trader at an international bank.

The optimism is supported by historical data that suggest the jewelry market is not actually that sensitive to bullion prices.

According to GFMS data, global jewelry demand held fairly steady during the last bull run, dropping only 10% to 2,404 tons in 2007 from 2,680 tons in 2002, despite prices increasing by 200% over the same period.

Jewelry demand slumped to 2,186 tons in 2008 and looks likely to come in below 2,000 tons in 2009, with the first half down 22% on year at 765 tons, but the timing suggests this has more do with the global recession, with prices rising only 18% from the start of 2009.

"It is an exceptional year (in terms of demand weakness)," said Yunus Oguzhan Aloglu, executive vice president at the Istanbul Gold Exchange, who expects a demand recovery in 2010.

A positive pattern was evident during China's golden week holidays when jewelry demand was stronger than in previous years.

“Even with the price higher, Chinese investors continue buying gold,” said Peter Lim Fung, head of dealing at Wing Fung Precious Metals in Hong Kong.

Moreover, scrap sales won't be a major source of supply in China, said Lila Lu, the Beijing-based head of precious metals at China Minsheng Bank. “Chinese people will not trade jewelry in (to buy new designs) as in India. It’s handed down the generations.”