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Edited Transcript of 601939.SS earnings conference call or presentation 29-Aug-19 8:30am GMT

Half Year 2019 China Construction Bank Corp Earnings Presentation

Beijing Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of China Construction Bank Corp earnings conference call or presentation Thursday, August 29, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Guiping Liu

China Construction Bank Corporation - Vice Chairman & President

* Hu Changmiao

China Construction Bank Corporation - Secretary to the Bord

* Ji Zhihong

China Construction Bank Corporation - EVP

* Lin Liao

China Construction Bank Corporation - EVP

* Yanmin Jin

China Construction Bank Corporation - Chief Risk Officer

* Yiming Xu

China Construction Bank Corporation - CFO

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Conference Call Participants

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* Jia Wei Lam

HSBC, Research Division - Analyst & Head of Greater China Banks Research

* Ran Xu

Morgan Stanley, Research Division - MD

* Shuo Yang

Goldman Sachs Group Inc., Research Division - Research Analyst

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Presentation

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [1]

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Fellow friends from the media and analysts, ladies and gentlemen, good afternoon. Thank you for taking time to appear at the 2019 Interim Results Announcement of the China Construction Bank, which is held both in Hong Kong and China, in Beijing, through video conference. And on behalf of our senior management, I express welcome and thank you for your coming here and also for your long-term support of our bank.

First of all, allow me to introduce to you this Mr. Liao Lin, our Vice President; Mr. Ji Zhihong, our Vice President; our CFO, Mr. Xu Yiming; our Chief Risk Officer, Jin Yanmin; Board -- Secretary of the Board, Mr. Hu. And also, there are representatives of our Board of Directors and board of supervisors with us, and I am the principal, Liu Guiping.

In the 2013 (sic) [2019], we faced a very unstable market, including Chinese-U. S. trade conflicts has brought a huge pressure on us. However, we have been able to keep our performance. And through the construction -- constructive reform of our supply side, we have been able to build new capabilities and new strategies to enhance our performance. And the bank has been tackling the challenges very prudently and also in compliance with the requirements of the regulators and working in line with the country's strategy to serve the industry and the society. And we have been able to build on a very solid foundation and build on growth that is very healthy and evident for the future development.

Now may I invite Mr. Xu Yiming to walk you through the 2019 interim results of the -- of our bank, and then we will move into the Q&A session.

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Yiming Xu, China Construction Bank Corporation - CFO [2]

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Friends from the media and analysts, ladies and gentlemen, good afternoon.

With your care and support, China Construction Bank continues to perform well in our first half of this year. I'm delighted to be reporting this to you. My colleagues have prepared a very thick pack of information. However, I will try to be brief in order to allow more time for you to ask questions. As you can see, now this is the overall performance indexes, and we can say that we have been enhancing our performance very prudently. And our development trend is going for the right direction, and our risks are properly managed.

Now how is it that we have been able to manage that? Now mainly, it is through implementing our 3 main strategies and to enhance our inner capabilities. So I'd like to walk you through our thoughts and our performance based on these 3 basic lines. The 3 capabilities, as you can see from the PowerPoint here and I think you have also heard about it, we have been able to enhance our capabilities in residence, leasing and in inclusive finance and fintech. These are our 3 main strategies.

Now there are some data available for our residence leasing. We have been able to put online a source of 17 million flats, and we have registered -- the number of people registered on our platform is also 17 million. And we have a 94% of coverage of all the cities in China. We are seeing that residence leasing is driving our growth. That is true. Our total balance in the first half of the year has increased by 28 million, and we have already exceeded the requirement of 36% in growth asked of us by the regulators.

And also with technology use, we've been able to push new products. For example, our Huidongni app now has been able to source 1.8 million of registered users. And our Mingonghui product, at this point of time, has been serving 1.44 million farmers. And we have been loaning CNY 15 billion of loan balance to these targets.

And with technology, we are practicing a Top+ strategy, and we have been putting in a series of work and measures to activate this. Now there are a lot of details in this PowerPoint, but let me walk you through 2 stories. One, on the one hand, we activate our creativity internally. And then to the external parties, we try to enable them.

Now first of all, within our own systems, for example, you have the experience of going on a business trip. Now previously, what you need to do is to first seek an approval as to whether you're allowed to conduct certain business trip, and then you would need to get some money from the finance department. And then you get -- you keep your invoices and have it reimbursed when you come back. So this is a lot of trouble for everyone. So what we are doing here is a business trip platform, a system, who has been -- which we are having -- we're having all of our staff use. All you need to do is to on the app, just click the point that you wanted to go on a business trip, and the approval process would be conducted online. And then after you go on a hotel, then you stay there for 3 days or 5 days, and then you -- the reimbursement process is all completed on this platform. And it makes everything very easy, and it makes our staff feels a lot better and our work more efficient.

Now how about enabling the external parties. For example, on the 14,000 at point of sales, we're already opening those up to the processing of the use of intelligent services. Now this is one example that I'm citing.

Apart from this, with the 3 strategies, we are also building caring stations as well as the CCB University to train our own talent. Now this is not only -- this is something that would build on our capabilities. The 3 capabilities is something that we are focusing on, but which capabilities? The first one is to serve the country, this to serve the country in its efforts to develop.

And we have also -- our debt-to-equity swap is already larger than CNY 180 billion, and our poverty support loan has exceeded CNY 195 billion, and our loan portfolio to agricultural related parties is beyond CNY 1.8 trillion. So our -- the loans that we've extended to the strategic industries in the nation is already larger than our peers.

Another area is our risk management capabilities. We have taken the active role to prevent, to monitor and to manage our risks. When we try to build, we are building a stable, prudent, comprehensive and active risk management culture. Say, for example, with the risk with the property segment, we felt that it is relatively larger. So how do we go about keeping our risk management there? For example, our property loans has succeeded in decreasing 5 areas and increasing 2 areas, the details of which I will not go into more detail, and then we also control our loans to industry sectors that have excess capacities.

And our nonperforming ratio has come down by 0.03 percentage points. Our classified concerned loans has come down by 0.02 percentage points, and our provision coverage ratio has improved by 10 percentage points. So our overall risk management capabilities have been enhanced.

And we are also enhancing our competitiveness internationally. Our RMB clearing ratio as well as our cross-border trade capabilities has also been enhanced. Of course, we have a lot more work to do, and we would -- we must improve ourselves, continue to enhance our international capability along the line and strategy of the One Road initiative.

Now because of our capabilities, 3 capabilities enhancement, we have been able to enhance our performance overall. Now there are a lot of details here, but I would just go over the tag line instead of going into the details, for example, the growth of assets and optimized structure.

We have maintained very robust profit. If you look at the chart on the right, which I covered already, the outer circle is getting larger. You have all the indicators expanding. So new developments have been made, new progress made, fees and commission income have been on a rise, and we've done a good job in cost control. The cost-to-income ratio has been kept at around 22% vis-à-vis 27% last year, and we are expecting lower cost in the coming half year.

We've managed our capital in a better manner. What I'm proud of is that our bond issuance in the market is less frequent than other peer banks. However, we have kept a rather good capital adequacy ratio compared with other banks.

Retail business has been strengthened. We give priority to retail and corporate businesses. We have strengthened retail business. We are talking about CASA account and loan business. As for corporate business, our interbank business, investment banking, settlement business have all witnessed growth. The number of customers and accounts are on the rise with a higher speed than other banks. Our online bank, mobile bank, WeChat banks have enjoyed good growth. Our foundation of development is further solidified with the higher operating capability.

Our successful story is ain't possible without your support. This page shows the accolades that we received from different institutions. Some of them are media outlets, the others, magazines. Probably you will say that other banks are awarded as well. But let me tell you something which is not on the page. The Ministry of Finance assesses big banks every year. There are tens of indicators in 4 categories. Our bank in 2018, our comprehensive assessment is above 90 in the scores, and this is the only one among the major banks in China. In recent years, in the assessment, we have been ranked #1 for 3 consecutive years. This is something that you will not be able to read on the media reports.

Last, but not least, let me talk about the challenges and opportunities in the future. We often talk about that opportunities and challenges coexist. Opportunities are something that people can share. Opportunities are in different aspects. We are talking about national strategic initiatives, including the JJJ area, Yangtze River Delta and Greater Bay Area and the driving force of domestic consumption as well as technological development. If we are prepared, we will be able to seize opportunities with which we can expand the customer base and business. As we say, we have what we call a second curve, which is regarding new finance. With new technologies, we can expand our business. So we can build a new finance with inclusive financial system and new technologies.

Of course, when we are doing these things, there is never short of challenges and difficulty. As I said, probably each bank is faced with the same opportunities and same challenges. But when it comes to each of them, there are differences. In general, the downward pressure of economy, including implicit and explicit debt pressure, and the burden on enterprises and the marketization of interest rate as well as a third-party payment services and fintech, which are increasing the disintermediation from banks, these are all important challenges that we are faced with. As we said, we need to be more capable in taking part in international competition.

That's all. Thank you.

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [3]

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Thank you, Mr. Xu, for your explanation. Now let's move into question-and-answer session. Your questions are welcome.

May I first invite the analysts and media from Beijing to raise a question and then we'll move to those in Hong Kong? Now prior to your question, please name yourself and your institutions. Because of time constraint, please limit your questions to one every time. Now may I invite the analysts from Beijing, please?

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Questions and Answers

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Unidentified Analyst, [1]

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I'm from Tianfeng Securities. My name is (inaudible). We discovered that lately the personal -- the credit cards and consumptions nonperformance have increased, and that's because of the mortgage. However, we also discovered that with the property price increase cycle, it would soon end. However, your bank, do you put emphasize on this area if the property price in [DCOM] stand? Have you estimated the impact that would be on your business? And what are the measures that you have put in place to tackle the negative impact? Are we still focusing on mortgage and leasing, given this downward cycle?

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [2]

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Now may I invite Mr. Lin to answer your question.

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Lin Liao, China Construction Bank Corporation - EVP [3]

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Thank you for your question. Just now, Mr. Xu has talked about 2 priorities, and the -- this retail is also one of the priorities. We have to evidently clarify that we are working on the broader retail segment instead of just retail loans. With residential mortgage, our balance is about CNY 5 trillion, and that is about 80% of total. The NPL ratio is about 0.2%. This is a very good quality.

At the same time, we are prioritizing on this residential mortgage as well as the consumption, personal consumption-related loans. And there's also a piece that -- in -- a piece of the small and medium fast loan as well as credit card loans. Now what I wanted to say is that we have diversified products in the retail segment.

As per requirements of the regulators, our residential mortgage would keep stable growth. However, with the other retail loans, we would also build it stably to form a circumstances where the key would be residential mortgage, and other retail loans would play a supporting role. And I don't believe that it would -- there would be any negative impact on our bank. It should rather be a positive one.

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Ran Xu, Morgan Stanley, Research Division - MD [4]

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I'm Xu Ran from Morgan Stanley. Just a question on how fast your loan business is. You've been more prudent in loan business in the second quarter, obviously. So what's your outlook for the loan business in the second half? The central government is still encouraging banks to launch more loans. When it comes to the pricing of loans, we're talking about LPR pricing. How much of the loan is using the LPR pricing method? And what are the changes in the second half?

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [5]

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Let me defer the question to Mr. Xu, our CFO.

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Yiming Xu, China Construction Bank Corporation - CFO [6]

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You observed our banks very carefully. Of course, our loan has slowed down in the second quarter, but it will not continue. This year has witnessed a very high number in the loan business, probably will slow down in the second half.

When it comes to LPR pricing, there are 3 stages. In the first stage, the percentage of LPR pricing loans will be 30% and 50% by the end of the year and 80% next year. When it comes to our bank, we are executing the requirements of the central bank carefully. The LPR pricing loans of our bank have surpassed the 50%. It's actually 56%. By the third quarter, our LPR pricing loans will be certainly more than 30%.

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Shuo Yang, Goldman Sachs Group Inc., Research Division - Research Analyst [7]

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I'm Yang Shuo from Goldman Sachs. I have a specific question regarding the financial data. We see that in the financial data, the company is making a lot of money or is quite high. Core capital adequacy is also very high. However, the dividend payout is at 30%. We see that other banks in the world, if they are profitable, they would raise this ratio and the shares will also go up. So I'd like to ask, with such a good performance, what is your plan of the dividend payout? And would you be raising the dividend payout ratio?

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [8]

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Your question is relates to finances. Let me ask our CFO to address it.

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Yiming Xu, China Construction Bank Corporation - CFO [9]

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Our dividend -- the payout ratio has been 35% and then a bit higher and then 33%. Now in the last couple of years, it has been at 30%. We believe that based on the yield of the CCB shares, we believe that this is actually quite okay. Your question is a question that many of our shareholders are interested to know, especially those in Hong Kong.

Now you were talking about the -- our capital ratio has been quite high. And we -- because of the internal capital and -- we are compensating this with our own capital. Why is it that we are doing that? That's because the requirement of our regulators for -- on capital would be more and more stringent and higher and higher, and we are also a systemic important bank, so we need to be very prudent. And we may exceed the 20% requirement in the future.

Now when compared to our peers from outside of China, we are actually quite high, and we need to plan accordingly. We believe that in the future, we would keep at 30% payout ratio. We understand your request. However, looking at the perspective of a long-term prudence business, we believe that 30% is appropriate, especially given that we are a centrally important bank.

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [10]

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Can we take another question. The lady on the other side, please.

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Unidentified Analyst, [11]

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I'm from Haitong Securities. In the nonperforming loans in the first half, corporate loans have improved in NPL. However, there is an increasing NPL in retail loans. Is it cyclical? Is it short term? Is it proper linked to your underwriting in the middle of the year?

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [12]

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Let me defer the question to Mr. Jin, the Chief Risk Officer.

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Yanmin Jin, China Construction Bank Corporation - Chief Risk Officer [13]

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Since 2013, we've been seeing an increase in risks. Of the recent 2 years, it decreased to a steady level with moderate decrease. Of course, that cannot be achieved without the change in the macro economy.

As for the structure of loans, we've seen high growth in retail loans. We've improved our structure of retail loans with increasing percentage of retail loans and more broad customer base. We see that the competition among banks is on a rise. So that's why we changed some of our thresholds in approving loans so -- for different reasons, including the change of a customer mix.

In retail loans, most of them are long term. So with a longer duration, the probability of default is rising as well. But the trend that doesn't show the general direction, it's something just for the short term, and it is specific to a certain product. You've seen different situations among different products because that -- probably consumer loans will rise in a faster manner. Personally, I think our bank is able to maintain a very good quality in this regard. The future trend will be steady as well.

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [14]

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Now please continue to ask questions, our analyst friends. Perhaps, we will give the opportunity to a lady at the back.

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Unidentified Analyst, [15]

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I am from [Li Tsang] from [Shanghai Hong]. I'd like to ask you, with the next half of the year and next year from asset to loan, what is the outlook?

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [16]

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You're talking about a net interest spread, right?

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Unidentified Analyst, [17]

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Yes.

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [18]

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So may I ask Mr. Xu, our CFO, to answer the question.

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Yiming Xu, China Construction Bank Corporation - CFO [19]

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The net interest spread, as like we expected, like last year, has come down a bit. That's mainly because of the deposit increasing. And the pricing of the loan has increased. However, it has not been able to offset the entire cost. In the next half of the year, we believe that our NIM would be kept stable as it is now. Now it may be that you may expect a 1 to 2 basis point of decline, if you will.

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [20]

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Now because of time constraint, we ask the media friends from Beijing to ask the questions.

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Unidentified Participant, [21]

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I'm from China Securities Newspaper. You are undoubtedly a big bank in mortgage business. Last year, the development mortgage loans were CNY 390 billion. Some media reports say that the central government will control the balance of development loans. As for your bank, will you take measures to control the balances of development loans?

Second question, you have established your subsidiary of wealth management. People are watching for your management of the existing assets of wealth management products. So is there any pressure on the nonstandard assets and off-balance sheet assets? Will you take any measures to deal with the new asset indicators?

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [22]

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Sorry. As I just said, please limit your question to one, but you've asked 2 questions instead. As for the question regarding development loan for real estate economy, let me defer that to my colleague.

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Unidentified Company Representative, [23]

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Our bank has been very stringent in implementing the central government policy as regards to the real estate market. We take a differentiated method in a prudent way in issuing the development loans to the property developers to support a healthy and steady development of real [estate] market.

You've mentioned some numbers of our issuance of developer loans. Let me give you some other numbers. The growth of development loans in the first half have slowed down for 5.66 percentage points. We are very prudent and selective in issuing developer loans, and the NPL ratio has come down to 0.81%, 0.3% lower than the beginning of the year.

In the coming months, according to national policies, we will implement the policies stringently to avoid speculation of real estate projects to maintain a steady real estate market. And we will implement the long-term management scheme of the central government and avoid using the real estate market as a incentive, as a way to boost local economy. We will strengthen our management of the quality of the loans issued to property developers, and we will optimize the structure of developer loans. We will continue to raise the threshold of developer loan application, for example, net profit, net capital at the real estate developers. We'll implement the policies of regulators seriously, making sure that the real estate development is compliant and healthy, and we will increasing our scrutiny in real estate market.

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [24]

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I'll answer your second question in -- that's our wealth management business, which is of a big scale for us. Our mother company, including ourselves, that business exceeds CNY 5 trillion. Now we strictly follow the new regulations and policies regarding wealth management. So we have formed a wealth management subsidiary. This is a specific action that we have taken in response to the regulatory requirement.

Now with the overall asset and wealth management business development, our thought is that we will need to construct with a system and a concept for wealth management and, on the one hand, sustainably drive the development of our wealth management business. And on the other hand, we need to tackle the issues that had been accumulated with nonstandard loans as per the requirement of the regulators, which are very specific. These requirements are very specific and clear. We are already working on the measures to tackle this. And when completed, we will disclose to the public. All in all, the solution would be in an -- structured in an orderly manner.

Of course, you mentioned whether it has an impact on our capital adequacy ratio. Now of course, to tackle nonstandard loans, there will be an impact. However, we will keep a balance based on those -- the CNY 2 trillion wealth management business that we already have with the mother company.

And we believe that the risk in here is controllable, and we will tackle it well. And when the solution and the strategies are well tracked, then we will disclose it to the public.

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Unidentified Analyst, [25]

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I want to follow-up a question which was asked before. You said that you will make efforts to develop personal loans, but according to your financial report, there is a decrease of 19.92% of personal loans. What was the reason? Is it because of the different standard? The central bank ask banks to follow the LPR policies when it comes to mortgage loan. Take Beijing, as an example. There is a 1.1% increase and 1.2% increase for the second apartment purchase. So what's your estimated range for the change because of the LPR policy? I would give the question to Vice President, Mr. Ji.

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Ji Zhihong, China Construction Bank Corporation - EVP [26]

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You mentioned a few different things. First, personal loans. Second, mortgage loans. As for personal loans, number-wise, we've seen less loan insurance compared with the beginning of the year. The issuance is on the same level as last year. There are many existing customers, and the loan repayment was very high. The second reason is that we continue to strengthen the optimization of risk model. We've rejected more high-risk projects. Third reason, as you are well aware, many banks are taking strong measures to issue more personal loans. So there is some kind of peer competition. I believe that Mr. Liu has already said that in personal loans, we've maintained our strategy of diversifying products.

The second question concerns with mortgage interest rates. LPR policy covers a wide spectrum of loans. If you look at the LPR requirements, we will abide by the central bank's rules and do a good job in preparing for the new policy. For example, amending contracts, the standard contract text, we are working with the mortgage department and legal department in amending the standard contracts. And we are also talking about the launch of a new mortgage loan system. We are busy with these projects. We will, in strict accordance to the central bank policies, implement LPR as the prime interest rate in future mortgage loans.

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [27]

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Gentlemen, we have taken 2 questions from ladies already. Well, once again, because of time constraint, the media firms have been asking more than one question, so please limit your question to one.

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Unidentified Participant, [28]

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I am from major news, (foreign language). Just last year, you have said that with the integrated ranking of the Finance Ministry, CCB has ranked first. Now all along, there has been a saying that in the near future, it is possible that CCB would, in the sense of profit and revenue, it would also become #1. So I'd like to see what your views are.

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [29]

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Now Mr. Xu, please take the question, including the revenue and the profit.

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Yiming Xu, China Construction Bank Corporation - CFO [30]

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You're talking about a quantity issue. I think it definitely should be an efficiency ratio. As far as quantities is concerned, we definitely is not #1. However, with our efficiency-wise, on a per capita or per employee ratio, along that line, we definitely is of good quality. The other one, please.

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Unidentified Analyst, [31]

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This year, our central government is very supportive of a real economy. LPR requirement also expects the banks to lower their real interest rate with LPR pricing in the second half. Will we see lower loan interest rate in the second half? Will NIM have any impact on future revenues? Are we prepared for that?

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [32]

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I believe LPR is an important indicator financially, so I will defer it to our CFO.

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Yiming Xu, China Construction Bank Corporation - CFO [33]

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The LPR reform includes 4 aspects. Now we increased the pricing range from 1 year to 5 years. The pricing baseline used to be different from bank to bank, but now it's in accordance with MLF, medium lending facilities. Third, the quoting banks have increased from 10 to 18 banks covering different kinds of banks from state-owned banks to local, small-sized banks. The frequency of quotation increased from once a month to once a day. The central bank is doing that because it wants to limit the range of interest rate within the range under its control. In the future, it will be more likely for the central bank to adopt a price-based method to controlling the interest rate.

If you look at the current policies, one thing stands out, which is that the bank, the central bank, is expecting a downward trend of future interest rates. However, the central bank has not yet mandated every bank to give them a standard interest rate. So the interest rate that we propose to the central bank is different from the real interest rate that we execute in loans. There is a 1 to 5 percentage points difference. I believe this is the intention of the -- of People's Bank of China and also the request of the market.

With interest rate coming down, we are, of course, subject to some impact. But the difference is not significant as we said, so the impact will not be big. And I believe the impact on interest rate is less than CNY 100 million in interest income. Next year, we might expect higher impact because of the existing loans. Of course, it will affect our existing loans and profitability. But everyone is under pressure.

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [34]

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Because of time constraint, we will end our question session for Beijing because we will have to still connect to Hong Kong. Now may I invite the analysts from Hong Kong to ask your questions, please?

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Jia Wei Lam, HSBC, Research Division - Analyst & Head of Greater China Banks Research [35]

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I'm from HSBC. My name is Gary. Now because we felt that the market is concerned about the trustee matter with Baoshang Bank, now can you comment on this trustee business? We feel that based on the original arrangement, is it that after a year, we will exit the deal? Or do you have different considerations? Now versus our relationship with the small and medium banks, now is this case of reference, call it, a value to the industry? And in the future, if there are a similar situation, will this be a good reference, a good way to tackle the matter? Or should we take this as a one-off nontypical circumstances?

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [36]

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I think you have asked something that we all would very much like to know. With the -- on May 24, the Baoshang Bank, the PBOC has announced that it would go under custody. The CCB and -- has been selected to take on this work. Now within the 2 to 3 months, the custodian work has been moving on very smoothly and orderly, and it is even -- it is better than expected. And the response from various areas have been good.

Now this is what I'd like to explain to you. The custodian work of Baoshang Bank is the CBRC as well as PBOC decision for marketized solution based on the latest rules and regulations. Now as a next step, the next step of disposal would also be done in a marketized and legal manner. Now at the time, I ask you -- at that time, I asked you to pay close attention to the announcements of PBOC and CBRC.

Now with these small and medium banks' issues, I believe that you have already noted that apart from the Baoshang Bank being under custodian, there is also Jinzhou Bank, which is being tackled in a new way. I believe that these new ways is beneficial to -- for the tackling of issues with financial institutions, and it can be taken as a point of reference as to ways to tackle similar matters. As to which one is better, I believe that as long as it is good for a stable and orderly disposal, then the matter would be appropriate. I mean the ways would be appropriate. Thank you.

Now please continue to ask questions from Hong Kong.

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Unidentified Analyst, [37]

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I'm from Credit Suisse. I want to follow-up on Gary's question. Your bank has done a good job in conversion of bonds to securities. At your investment branch, we see that ICBC used it to invest in some stakes in Jinzhou Bank. So is your subsidiary active as well in looking for different investment opportunities? Should that be something in your consideration as regards to future work plans?

Another question is your bank has been very steady in business performance with one of the best performances among peer banks. That's because that you've done a good job in cost control. Will a -- will the cost remains low in the future? You've mentioned that you want to keep a certain percentage of fintech in your business. So will the percentage remain at 2% or 3%? Will we see higher percentage of fintech in the future?

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [38]

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You've asked 2 questions again. The first question relates to small and medium-sized institutions. Let me tell you, so for Baoshang Bank, we are the custodian bank instead of a bank that takes over. So we have been playing a role of a custodian bank. It's not a takeover.

What I can tell you is that as for now, we have not yet studied the possibility of taking over any institution. Probably, we will think about that in the future. So stay tuned. We are only a custodian bank. As for the cost-control question, I will ask Mr. Xu to take it.

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Yiming Xu, China Construction Bank Corporation - CFO [39]

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As I said, our cost-to-income ratio has been around 27% over recent years. In the previous results announcement meeting, I said I thought the cost-to-income ratio was very low, and it couldn't be lower.

First of all, because our cost of employees have been very low, we have been highly efficient. However, that's because our employees have sacrificed a lot. However, this is against the rule of economy. All our employees are working with the same workload than other peer banks, the cost will increase as well. We want to give more benefits and returns to our employees with such a good business performance. So there will be higher cost of employees in the future, and technology will lead to higher cost as well. In our meetings with the big shareholders, we mentioned that we would increase the cost-to-income ratio probably to 30% because of investment technology.

And can we have one more question from the analysts in Hong Kong?

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Unidentified Analyst, [40]

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My name is [Art Myongtin] from (foreign language). I also would like to ask about our asset quality. We have seen in the last couple of years some very pleasing trends. All of the banks, especially like the CCB, your own -- you have been adjusting your assets and your quality and have reduced your loans to high-risk industries and increased your retail loans. Now looking into the economy, there's this trade war and other pressures. So I'd like to ask if we look at in the future, longer than 6 months more into the future, what are the perspectives that you would use to look at the future? And what are the risks that you would focus on? And in the next 2 to 3 years, what is the overall guideline for risk management and asset quality?

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [41]

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Now may I invite Mr. Liao to take your question?

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Lin Liao, China Construction Bank Corporation - EVP [42]

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I have been waiting for this question about asset quality. Now let me first walk you through the first half of the performance in asset quality. The -- overall, it has been very stable. Now our NPL ratio, especially the new ones and the concerned, these and other 5 indexes have all come down. And the other data, other performance has also been performing very stably, especially those loans that are over 90 days. It is only 67% of our overall NPL ratio, NPL, which is, I believe, a better number amongst our peers. And the provision coverage ratio is 218%, which has increased by 10 percentage points, and we are also looking at a comprehensive active prevention, monitor and management system. We have been -- we have used 5 years to build this mechanism.

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Unidentified Analyst, [43]

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So if you are not looking only at the second half of the year but looking at the longer term, how do you look at quantity or quality of the asset?

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Lin Liao, China Construction Bank Corporation - EVP [44]

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Now with monitoring, we look at the second half of the year. We have 7 areas to look at for nonperforming loans. For provisions, we have 5 characters. For asset quality, we have another 5. So for these, we are not looking only at half year. We -- but looking at these indexes and indicators. Our future seems to be very stable, and we would not be impacted in a big way as far as our NPL ratio is concerned by things like the trade war. And we also take active monitor of the different subsidiaries and 3 -- and various projects. I mean each of our key members from [1 1 3] onwards to the first half of the year, the indications all showed good numbers.

Now when we look at a longer term, 5 years, 10 years, if analysts, you pay attention to that in -- after the financial crisis in 2008 and all the way to 2018 and the first half of 2019, commercial banks' NPL ratios versus CCB NPL ratio, you will find that CCB NPL rates has always been running better than the peers regardless whether it is 5 years or 10 years. And we also monitor potential risks, including external risks as well as internal risks as well as financial risks. We look at these from 3 different dimensions. And we look for the possible problems that exist in our CNY 14 trillion of loan portfolio and asset portfolio. So this -- we have been keeping it very stable. So if you'll ask me about the future, I can tell you that we are confident to keep asset quality at a controllable improving status and stable one, too.

Just one point, one viewpoint that you have mentioned, I'd like to comment on it. We have not placed a lot of our business on high-risk industries. This is not our policy. Our policy is for prudent, comprehensive, active and stable risk management style, where all -- our risks are all distributed, dispersed. We do not put a lot of our business on the high-risk sectors.

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [45]

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Another question from Hong Kong.

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Unidentified Analyst, [46]

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I'm [Xi Ram] from CCBI. A short-term question. In the first half, there was a rebalance of the aging loans. Will we have greater pressure in the second half?

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [47]

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I will defer the question to our CRO, Mr. Jin.

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Yanmin Jin, China Construction Bank Corporation - Chief Risk Officer [48]

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As for default loans, of course, we are under pressure, as you said, but we have maintained the size difference of the nonperforming loans and the default loans were the only case among major banks. As for default loans, for those loans not more than 30 days, its percentage is still low. As for the loans default for 60 days or more, we will take them in the provision for impairment. So in general, the risks are under control.

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [49]

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Can we have one more question from Hong Kong?

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Unidentified Analyst, [50]

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I'm from Huatai. My name is [John Xutin]. I'd like to ask this quarterly loan interest trend in the first half versus the second half of last year. The loan interest rate has climbed when comparing quarter 2 to quarter 1. How does that look? And if we look at the half yearly figure, the personal loans has been increasing. Now how -- now what is the comparison from quarter-to-quarter looking like? And also with retail versus corporate loans, what is the outlook?

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [51]

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Now you've actually asked 3 questions. Now Mr. Xu, please?

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Yiming Xu, China Construction Bank Corporation - CFO [52]

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The pricing of the loans in the first half of the year, you can look at it in 3 segments. The corporate loans and personal loans, the pricing has both come down. With mortgage loans, it has gone up. So this is how first half of the year basically shows. And in the second half of the year, if we look at the LPR, the loan pricing would continue to come down. It is almost not possible for it to go up again. Especially with personal mortgage loans, there has been clear regulations requirement, including for first-time buyers and second-time buyers, meaning there has been clear regulations. As far as the loan quantities is concerned, there won't be a lot of difference. So overall, the pricing for -- the loan pricing for the second half of the year may be lower than the first half.

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [53]

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In the interest of time, so much for the questions from Hong Kong. Let's take a few questions from the media in Hong Kong.

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Unidentified Participant, [54]

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From Economic Journal. Your business performance is very good, but you don't pay dividends. Mr. Xu explained that your dividend ratio will remain at 30%. Can you give us the reasons of why you didn't pay dividends? Our second question is what's your view on the upcoming trade war? What's your idea on the impact on your bank?

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [55]

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You asked 2 questions again. Your -- as for your follow-up question, Mr. Xu, please take the question. And the second question will be diverted to Mr. Hu.

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Yiming Xu, China Construction Bank Corporation - CFO [56]

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As for dividend payout, it's once a year. So this is why we don't give dividends in the interim report. In July, we gave CNY 75 billion of dividends. So the next time, our dividend payout will be in July next year.

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Hu Changmiao, China Construction Bank Corporation - Secretary to the Bord [57]

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Regarding the question about China-U. S. trade war, the trade war is escalating despite the negotiations. The U.S. side has been backing on, that's why the trade war has been escalated. Of course, there is some impact on Chinese economy, but the impact is just for short term, and it's limited because Chinese economy is enjoying very high-quality growth with internal momentums.

Our GDP growth rate remains 6.3%, which is outperforming other countries. We have a strong labor force with 170 million of highly educated workers. We, in this way, have much leeway in changing the economic development model. China has a lot of measures in its strategy in managing the macro economy. So the impact and risks are totally in control.

When it comes to our bank, our bank has been a strong one in construction, infrastructure projects and mortgage loans. So that's why the trade war is not affecting us too much. We are, however, keeping a close eye on the trade war. Where it goes in the future, we will evaluate related risks and see what measures should be taken. Anyway, the risk is under control.

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [58]

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Can we have one more questions from the Hong Kong media, please?

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Unidentified Participant, [59]

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I'm from [Nine TV]. I manage (inaudible). I'd like to ask the quarter 2 NIM has come down by 0.04 percentage points in the second half. Would it continue to fall?

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [60]

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Mr. Xu, please.

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Yiming Xu, China Construction Bank Corporation - CFO [61]

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Just now, the same questions was raised by media in Beijing. I believe that in the second half, basically, we would remain stable, and it would come down by 1 or 2 basis points in the next year. Now that's because our loan pricing does not have a large room for increasing in pricing. And that's the -- probably the purpose of the LPR pricing mechanism.

And also, we are conducting strict control over deposit. As you can see, the NIM has become smaller. One very important factor's because our costs for personal loans have risen very quickly, and we have been looking into this. So in the second half of the year, the high interest rate loans may slow down. And -- but I do expect that to be kept stable with a 1 to 2 basis point drop if need be.

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Unidentified Participant, [62]

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I'm from (inaudible). I have a question regarding interest rates. People say that there will be further room for China to cut interest rates in response to external factors. What's your view on the possibility of rate cuts in China in the future? If there are rate cuts, will it be greater impact, I mean, more than 1 or 2 basis points?

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Yiming Xu, China Construction Bank Corporation - CFO [63]

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As for rate cuts, externally, the rate hike cycle in U.S. has ended. The Fed rate has been raised for 9x with one rate cut in August. So that may bode for the start of rate hike cycle. In the future, I do think we have the necessity and room for rate hike. In the second half, PBOC will eye on more rate cuts because of the change in liquidity. As regards to their methods, of course, they can resort to prime rate. However, now in a dual-track system, PBOC cannot only resort to the prime rate to cut rates. Of course, the PBOC will resort to MLF when LPR system is in place. This is my view as far as what the PBOC would do as for the rate cuts.

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [64]

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Another question, please? Please, media friends from Hong Kong, do you have any further questions?

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Unidentified Participant, [65]

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I'm from Ming Pao. My name is [Chen Wei Sun]. Despite that your scale of the subsidiary in U.S. is still not very big, but with the more and more heightened relationship between U.S. and China, are you concerned that the operating end business of the U.S. subsidiary would be under stricter and stricter regulations? And now if this risk becomes bigger and bigger, how would you be tackling it?

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [66]

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Mr. Liao, please?

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Lin Liao, China Construction Bank Corporation - EVP [67]

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U.S. -- you probably is talking about the impact of the U.S.-China trade conflict. We have a New York branch in the U.S.A., and we needed to step up with our compliance work especially with the AML work. We should continue to manage and of -- and monitor it well and be more efficient in entire money laundering screening. So we have stepped up comprehensively in our compliance team as well as the compliance officer in -- for the New York branch. We have stepped up on our compliance -- communication with the compliance and regulators in the U.S.A. All of our management work and our operation is in line with -- is compliant with the regulations. And under our Board, there has been a U.S. risk management group that is focused on this task. At this time, our communication with the regulators are good, and there's no big issues.

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Guiping Liu, China Construction Bank Corporation - Vice Chairman & President [68]

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In the interest of time, the results announcement conference is closed now. Thank you for all the questions. And I thank analysts, journalists and other friends for your support and attention to our bank. If you have more questions, please get in touch with our PR department, thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]