Finally, I stepped into the HSBC Head Office in March 1971 to start my training. The Assistant Manager Operations welcomed me and walked me to the “Export Department” to meet the Officer-in-charge. All eyes were on me, as it was a great honour and privilege to join the Resident Officer Trainee Camp.
It was fitting that I started with the Export Department, because this was the original heart of the Bank, the nucleus of the “Finance of Trade” which was the original purpose of the Bank establishment.
The Export Department was located on the mezzanine floor on the left side of the grand banking hall. There were about 50 staff, headed by a Head of Department of Portuguese descent. There were stories of the dedication of Portuguese staff, in sticking with and defending the Bank, during the Japanese occupation of Hong Kong in the Second World War. This dedication was rewarded when peace returned to Hong Kong, resulting in a good number of Portuguese staff promoted to important positions. Besides, the Portuguese staff spoke fluent English as well as Cantonese, and their culture more compatible to that of the British. The Portuguese staff came from Macau, three hours ferry ride from Hong Kong. From 1960s onward, the Chinese overtook the Portuguese in job advancement as more western educated Chinese joined the working force.
I got along very well with my Portuguese colleagues, but I noticed that there was a gap between Chinese and Portuguese because they had different values and way of life. Intermarriage was rare, but young Chinese girls fervently chased young Portuguese boys for their good look, not so much for pursue of matrimony, more for pleasure.
What exactly was the function of the Export Department! Let’s step back a little and see how trade is financed.
Cash payment. An oversea buyer can pay the manufacturer upfront and wait for the goods to be delivered. The risk is big for the buyer because the seller may fail to ship. Or the manufacturer can ship the goods first and wait for the buyer to make payment. The risk is big for the manufacturer as the buyer may fail to pay.
A safer payment system, called “Documents Against Payment” was created, whereby the manufacturer ships the goods and hands over the Bill of Lading (along with invoice, packing list and other relevant documents), to his bank. His bank forwards the documents to the buyer’s bank, who hands them over to the buyer upon payment. The payment is then remitted to the manufacturer. A Bill of Lading is a formal document issued by a shipping company acknowledging receipt of goods for shipment. When the goods arrive at destination, the Bill of Lading must be presented to the shipping company, in order to take delivery of the goods. This Documents Against Payment system has its flaw though. What if the buyer changes his mind and refuses to take delivery of the goods at destination. The manufacturer will have to warehouse the goods and look for another buyer, incurring additional expense and possible loss. This system is only practical where the buyer and manufacturer have great trust in each other.
A second more secure payment system, called “Letter of Credit” was created. A Letter of Credit is a sort of promise by a Bank, acting on behalf of the buyer, to guarantee payment to the seller when the goods have been shipped. The seller ships the goods and presents the Bill of Lading to the Bank to get paid. Under this system, the buyer is guaranteed that the seller will ship the goods, and the seller is guaranteed to get paid once he ships the goods.
Letter of Credit is not, however, foolproof. Though the bill of lading is evidence that the Shipping Company has received goods for shipment, there is no guarantee that the goods are genuine goods. There were cases where unscrupulous manufacturers shipped rocks, and by presenting the relevant bill of lading to the Bank, they got paid and disappeared. The buyers unfortunately had to bear the loss as the terms and conditions of the Letter of Credit had been fulfilled.
To prevent manufacturers from shipping non-genuine goods, the buyers can put an extra condition in the Letter of Credit, requiring an Inspection Certificate by a renowned Inspection Firm, confirming the authenticity of the goods loaded on board. Many of the world trades today are still conducted using Letters of Credit.
A third system of trade finance is called “Documents Against Acceptance”. Here the manufacturer ships the goods, presents the Bill of Lading and other relevant documents to his Bank and gets paid immediately. The Bank mails the full set of documents to the buyer’s bank. The buyer accepts the Documents and signs a Bill of Exchange which is a promise to pay after a certain number of days, typically 30, 60 and 90 days. This allows the buyer time to sell the goods and receive income to make the payment thereafter. If the buyer fails to pay on maturity date, the Bank can sue the buyer under the Bill of Exchange. The financing Bank will do due diligence as to the financial ability and creditability of both buyer and seller, before agreeing to this system of trade finance.
The Export Department handles the shipping documents, pays the manufacturer instantly, so that the latter has cash flow to embark quickly on new production. The Bank recovers its money sometime later, and charges interest for the number of days it is out of pocket. The Bank also makes money by charging a fee for handling the documents, as well as benefit in the currency exchange. The Export Department, therefore, plays an important role in facilitating trade around the world and contributes significantly to the bottom line of the Bank.