They never saw him coming: the man with the bag of crabs. Donning large aviator sunglasses, he strode into the property fair in the eastern Chinese city of Nanjing and calmly launched his protest.

He plucked out six crabs on rope leashes, each with tags – “high housing prices” and “high land prices” – tied to their backs. His accomplice unfurled a large banner that asked: “When will housing prices stop going wild?” The crabs crawled all over it, a scuttling metaphor for Chinese property developers.

Compared with the occasional demonstrations that turn violent in China and bring out the riot police, the man’s act was innocuous. He slipped away as quietly as he entered the exhibition hall. His identity remains a mystery.

But the humour of his protest cannot mask the seriousness of the issue. Property prices have almost quintupled in leading Chinese cities over the past decade and they are perhaps the biggest single threat to the country’s economic and social stability. For the economy, the fear is that China is in the middle of a property bubble that will eventually burst and trigger a financial crisis. For society, frustration about housing prices is widespread and their continued rise only fuels more discontent.

The government is keenly aware of both risks. In his first news conference as China’s premier in March, Li Keqiang promised to rein in the property market – something his predecessor, Wen Jiabao, had also repeatedly vowed to do. “This will benefit people’s lives and promote economic development,” Mr Li said.

Yet since he spoke, the property market has been little short of frenzied. Housing prices in prominent Chinese cities are up almost 20 per cent year-on-year. Various explanations have been given: pent-up demand from first-time buyers, capital inflows and relatively loose monetary policy have all played a role.

But there is an additional factor, one that will be deeply embarrassing for Beijing if it cannot be resolved. A campaign to build 36m affordable homes by 2015, a centrepiece of the government’s strategy to cool the housing market, is shaping up to be a failure. The policy has not succeeded in curbing property prices, and has instead become a hotbed of corruption and a fiscal burden for already indebted companies and cities. China’s affordable housing drive is at risk of going badly off course.

Much criticism has focused on the 36m target because it overstates what is really being built thanks to malleable definitions. But even if only half the target is hit, it would still amount to nearly one in every two homes built in China over the past five years – a highly impressive accomplishment. “Construction is not the biggest issue. Chinese are good at constructing things,” says Du Jinsong, an analyst with Credit Suisse. “The biggest concern is how can you make sure that the allocation of affordable housing is fair and effective.”

People who need cheaper homes such as Zhou Yongli, a computer programmer in Nanjing, have so far struggled to secure one. “You must have good government connections to be able to buy one and I don’t have that,” the softly spoken 26-year-old says. He rents a single room in a remote suburb for Rmb700 ($114) a month. “I can’t even think about buying a normal apartment. It’s a bubble economy and prices are just too high.”

The widely held belief that only well-connected individuals can obtain affordable homes is an exaggeration, but there is a kernel of truth to it. Affordable homes sell for as little as Rmb300,000 ($49,000), less than half their market value, a very tempting proposition. Earlier this year the director of a municipal housing bureau in the large central city of Zhengzhou was detained and accused of illegally owning some 29 properties, at least 11 of which were affordable homes. Xinhua, the state news agency, did not mince its words. Officials have “easily amassed dozens” of affordable homes and “taken away housing units specifically intended for disadvantaged groups”.

In August the national audit office estimated the scale of the rot. It said that Rmb5.8bn of funds for affordable housing had been embezzled or mis-directed last year and that 110,000 homes had been obtained unfairly with false documents. The figures were small compared with the overall size of the programme (Rmb880bn was allocated to it last year), but audits in China are rarely comprehensive and the findings were seen as just a sample of the misdeeds.

The response to the corruption – heightened scrutiny – has itself posed a new challenge. Developers building the affordable homes say regional governments have in some cases been too tough in vetting who can actually buy the properties. Vanke, China’s biggest listed developer by sales, is close to completing a vast complex in the southeastern corner of Nanjing that will house about 40,000 people. It is one of four similarly sized projects in the city of 8m people that will be ready for residents within the next six months. Demand for them has been surprisingly weak despite their cheap prices. “The government really wants to sell these homes to low-income people but the purchasing power of those who actually meet the government’s standards is extremely low,” says Wang Li, a Vanke engineer working on the complex.

To keep costs down, Vanke has introduced innovations such as using plastic-mould, aeroplane-style bathrooms. Produced by the dozen in factories, they are solidly built and cheap to install. But labour and material costs still mean that the baseline price for affordable homes is about Rmb4,000 per square metre. “For those qualified to buy them, these prices are still astronomical,” Mr Wang says.

Even when prices are reasonable and corrupt officials are kept away from them, affordable housing developments have run into another stumbling block: many are in the back of beyond, where land is much cheaper. “If the housing is good, it gets allocated to officials and friends. If it’s bad, it’s so remote and very few people apply for it,” says Mr Du of Credit Suisse. Caijing, a leading Chinese magazine, surveyed affordable housing developments across the country in August and found that many were about 20 per cent empty. Several were more than half unoccupied. Bad locations and poor transportation links were cited as the main reasons.

For those who have moved in, inconvenience is a small sacrifice for a cheap home. Zhang Jing, 45, has a sallow complexion from a kidney disease that keeps her from working, but says with a broad smile that she has nothing to complain about. She was given the keys last year to an apartment with a heavily discounted rent in Nanjing’s Daishan affordable housing complex. She pays just Rmb73 a month for it. “This is the benefit of having the Communist party in charge. And I’m telling you, I’m not a party member,” she laughs.

But Ms Zhang’s is a rare case. Only three small buildings are reserved for subsidised rents in the sprawling Daishan development. The vast majority of her neighbours were forcibly relocated when their older homes in the city centre were razed. About an hour’s drive from the city, many of Daishan’s apartments stand empty.

Optimists say it is too early to write off China’s affordable housing policy. Because it takes about three years to build large developments, many of the properties started at the beginning of the programme are just about to come on the market.

The 40,000-resident Vanke complex in Nanjing was supposed to be funded in large part by pre-sales of its apartments. So, when demand was underwhelming, the pace of development also slowed. But Mr Wang, the engineer, says the government helped plug the gap by issuing additional bonds to create a pool of cash for developers and also by softening the eligibility rules for homebuyers.

“The government had never worked on housing projects of this scale before and they weren’t entirely sure how to manage it. At Vanke, we’d also never worked on something of this magnitude. So the first couple of years were arduous. But we are all feeling our way through it, and little by little it is getting better,” he says.

In public, property developers have been enthusiastic backers of affordable housing. After years of raking in handsome profits, building cheaper homes is both good for their public relations and a political imperative. “The government dictates that our gross profit on the homes can be no more than 3 per cent of our investment. That’s very low,” says Chen Xinghan, president of Chixia Development, a Nanjing property company building one of the city’s large complexes. “You see, developers can have big hearts. You really have to have a strong sense of social responsibility to do this kind of thing.” Happy City, the Chixia complex designed for a mere 36,000 residents, is just about finished. The feisty Ms Chen trumpets that it has received two-star “green building” certification, a stamp of quality that few normal developments obtain.

But the strain on property companies from these good works can be substantial. Chixia’s debt-to-asset ratio rose to 114 per cent at the end of the first quarter this year from less than 90 per cent at the start of 2012 partly because of the vast scale of its affordable housing efforts [Business registration in China]. Chixia was one of the dozens of developers reprimanded by the national auditor in August. It had taken a Rmb150m bank loan ostensibly for affordable housing but then used it to repay loans from a commercial development. Ms Chen says it was just a clerical error and that the mistake was corrected as soon as it was spotted.

Once one of China’s biggest developers of affordable housing, MCC Real Estate has now turned its back on it. At the end of 2011 MCC, a state-owned company, had 50 separate affordable housing projects on the go, with plans to invest Rmb51bn. But when those were completed, it found that a series of regional governments, including Nanjing, were either unable or unwilling to pay for the buildings, as previously agreed. As a result, MCC’s long-term receivables – a gauge of what it is owed – rose by a third in the first half this year to Rmb31bn. It announced its intention late last year to quit the business of building affordable housing, calling it a “low-return asset”.

At its Lotus New City development in Nanjing, concrete foundations for the next phase lie abandoned – an aggressive push into affordable housing that came up short [Visa].

At the Daishan affordable housing complex, located at the far southern end of Nanjing, Yang Yuezhen, 25, pushes her infant in a stroller to collect a package from a delivery man. Previously crowded into a one-room apartment with her parents-in-law, the subsidised house was her family’s only way on to China’s vertiginous property ladder. But it has been tough. Few others have made the move to Daishan, so there are no big stores nearby. Ms Yang relies on online shopping for most of her needs. “This complex is just too remote,” she says.

Her husband rides his electric motorbike for more than one hour to reach the city for work. Nanjing has promised that two subway lines will eventually connect to Daishan, though work has yet to begin on either. “When it’s all built up, this will be a good place,” Ms Yang says. “It’s just that we may have to wait a while.”

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