How high will they go before they pop? Cranes at a residential construction development near Canton Tower in Guangzhou, China. Photographer: Brent Lewin/Bloomberg
How high will they go before they pop? Cranes at a residential construction development near Canton Tower in Guangzhou, China. Photographer: Brent Lewin/Bloomberg

Among the many reasons to dismiss President Xi Jinping's pledges to transform China's growth model, Gan Li may offer the best: an epic housing bubble that can't be allowed to pop.

Gan, a professor at Southwestern University of Finance and Economics in Chengdu, Sichuan and at Texas A&M University in College Station, Texas, recently crunched some disturbing numbers on the level and distribution of household income and wealth. After examining survey results from 28,000 households and 100,000 individuals, Gan believes that roughly 65 percent of China’s household wealth is sitting in real estate.

An astounding 90 percent of households in nation of more than 1.3 billion people already owns homes. In the first half 2012, he found, about 42 percent of demand for properties came from buyers who already owned at least one. Many of these homes and apartments, it goes without saying, were bought in the midst of one of history's biggest real estate booms and bubbles.

“The Chinese housing market is clearly oversupplied,” Gan told Tom Orlik, a Bloomberg economist based in Beijing. “Existing housing stock is sufficient for every household to own one home, and we are supplying about 15 million new units a year. The housing bubble has to burst. No one knows when.”

When is does, the damage to household wealth will reverberate across the second-biggest economy, devastate consumption and increase risks of social unrest. In other words, it's something the Communist Party can't allow to happen. While Xi's promises to tolerate less gross domestic product growth as he weans China off its addiction to exports, the pressure to sustain property prices will take precedence over reform.

China’s social compact is simple: We raise your living standards and you don’t head to Tiananmen Square with protest banners. Beijing is loath to test this arrangement after the events of 2011. Arguably, no episode in the last two decades spooked Communist Party bigwigs more than the "Jasmine revolution." China's pro-democracy protests inspired by the Arab Spring uprisings were peaceful, but their size and breadth -- demonstrations emerged in at least 12 cities -- shook then-President Hu Jintao's government.

The surging cost of housing was among the most cited grievances of protesters. Now, China risks enraging the ranks of homeowners throughout the nation if prices plunge along with GDP. Everyone knows China needs to rein in credit and curb its vast shadow banking system. If policy makers push too hard, though, they may provoke the ire of a new generation of middle class “fang nu,” or housing slaves -- a reference to the lifetime’s work needed to pay off debts.

There's also the other end of the market to consider: newly minted millionaires and even billionaires among the ranks of the Communist Party. That would all seem part of Deng Xiaoping's grand plan. The trouble is, many of those now getting gloriously rich appear to be closely related to Deng's political heirs, as documents obtained by the International Consortium of Investigative Journalists allege. Even the name of Xi's brother-in-law has come up in press reports detailing a series of secretive offshore accounts.

Just a reminder to anyone who thinks Beijing will have an easy time restructuring the economy to pull it away from the grasp of the 1 percent. The desire for change understandably shrinks as overseas bank accounts swell. Few of the epochal changes Xi proposes will work without the cooperation of these reluctant cadres.

The pivotal role of housing in China's economy makes the sector too big to fail. Nothing worries Xi's government more than the specter of public unrest, which explains its increasingly aggressive moves to censor the Internet and mobile-phone texts. And nothing would unnerve the masses faster than watching 65 percent of household wealth evaporate in a matter of weeks.

At some point, China's property bubble will explode. But for now, expect the government to pull out all the stops and borrow as much as needed to prop up housing values and, by extension, the nation's GDP bubble.

(William Pesek is a Bloomberg View columnist. Follow him on Twitter at @williampesek.)

To contact the writer of this article: William Pesek in Tokyo at wpesek@bloomberg.net.

To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.