When HSBC bought its 19% equity stake in Bank of Communications for $1.7 billion in 2004, it seemed like a smart way to bet on China’s fast growing economy without the ethical minefield of direct lending within an authoritarian state. BoCom was China’s fifth-largest lender, but only had $112 billion of assets, compared with $1.3 trillion at HSBC itself.

Today, China’s economy is ten times bigger than it was in 2004, and BoCom’s balance sheet is now $1.92 trillion, approaching two thirds of HSBC by size. Indeed, this rapid growth recently prompted the Financial Stability Board to classify BoCom as a G-SIB. Meanwhile, it pays an annual $730 million dividend to HSBC – which amounts to 12% of the global giant’s profit before tax.

So when HSBC suddenly wrote down the value of its BoCom stake by $3 billion, it focused attention on how the global giant accounted for BoCom on its balance sheet. Accounting experts say that the stake should be reported at its $8.8 billion fair value, rather than the $21 billion that rules allow. But where did the $12 billion gap come from? Risky Finance investigates.