China Property Boom Shows No Sign of Abating

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At the end of March, China's newly installed premier Li Keqiang publicly reiterated the government's determination to rein in rising property prices and a resurgent investment binge in the country's real estate market.

But by every measure the market continued to boom in April, with prices, sales and investment in new buildings all accelerating from March.

New house prices in 70 major cities rose by an average of 4.3 percent in April from a year earlier, accelerating from 3.1 percent in March, according to estimates from Nomura based on partial data provided by China's National Bureau of Statistics.

"April's data show that there has been no slowdown and the housing price increase was as strong if not stronger than in previous months," said Du Jinsong, a real estate analyst at Credit Suisse. "Even as investment has slowed down in most other parts of the economy it remains high in real estate."

(Read More: China April Housing Inflation Quickens)

That apparent contradiction provides one possible explanation for why Mr. Li's efforts to curb surging real estate prices and investment seem to have been so ineffective.

With trade, manufacturing, investment and consumption all performing worse than Beijing would like, the country's new leaders, who took over officially in March, feel they have little option but to let the property market froth a little to shore up headline growth.

In what many analysts have interpreted as an undeclared policy reversal, Mr. Li quietly dropped all reference to reining in the property market in a prominent economic policy speech he made in late April.

"In April the only bright spot in China's economy was the property sector, with property sales and new construction starts very strong," said Wang Tao, chief China economist at UBS in Hong Kong. "The leadership has a dilemma – they don't want a property bubble but at the same time they don't want to kill the sector and see property activity drop in the current weak environment."

The central government has actually been trying to bring down overheated real estate prices and adjust the structure of the market since 2010, with varying degrees of success.

(Read More: China President Takes Charge of Sweeping Economic Reform Plans)

Officials did manage to halt the doubling and tripling of prices seen in some regional property markets in the wake of the global financial crisis but only after many cities imposed draconian bans on price rises or purchases of second homes.

A major problem for the central government is that regional and local officials have little incentive to cool down the sector, which provides them with their biggest source of revenue.

Cash-strapped local governments are not allowed to directly raise money from capital markets and the bulk of their normal tax revenues are supposed to be handed over to the central government for redistribution.

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But local governments – and corrupt officials – are able to rake in huge sums by seizing farmland, designating it as much more valuable residential land and then selling it to commercial real estate developers.

Over the past decade this process has created enormous wealth, driven urbanization and provided the single biggest source of growth for the Chinese economy and its seemingly insatiable appetite for industrial commodities.

It has also been the main cause of social tension and a rapid rise in the number of protests and local uprisings across the country.

The government worries that land grabs and soaring housing inflation undermine Communist party legitimacy and feed anti-government sentiment and that is a major reason Beijing has sought to intervene in the market in recent years.

"In the minds of the people, the [excessively high] housing price is very symbolic of the wealth gap and unreasonable, unfair distribution of wealth so the central government has announced various measures [since 2010] to curb the property market, lower prices and preserve social stability," said Qin Hong, director of the Policy Research Center at China's Ministry of Housing, at a forum last month.

(Read More: China Housing Curbs Kick in, So Why Are Stocks Up?)

But she acknowledged the government's efforts have not been terribly effective. "No government can really design the structure of a modern property market," she said.

This reality was underlined by the fact that new restrictions and a new property transaction tax announced by the central government at the end of February have not been fully implemented in any city apart from Beijing.

The fading usefulness of Beijing's administrative measures is reflected in the flood of credit that is now going back into real estate rather than boosting consumption or investment in other parts of the economy.

A surge in lending that began in the second half of last year has continued this year, with total credit in the economy rising 64.7 percent in the first four months of 2013 from the same period a year earlier.

With the government reluctant to crack down on the real estate market again for fear of stalling the entire economy, some analysts are worried that another credit-fueled real estate bubble is already in the making.

"From the local governments' perspective it really looks like the real estate market is the last hope in terms of boosting the economy," said Mr. Du from Credit Suisse. "In the near term people think the housing market must do well to support other parts of the economy but in the long term this is not sustainable."