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The novel provides a detailed, episodic record of the two branches of the Jia clan, the Rongguo House and the Ningguo House, who reside in two large adjacent family compounds in the capital. Their ancestors were made dukes, and as the novel begins the two houses remain among the most illustrious families in the capital. One of the Clan's offspring is made an Imperial Consort and a gigantic landscaped interior garden, named the Prospect Garden, is built to celebrate this event. The novel describes the Jias' wealth and influence in great naturalistic detail, and charts the Jias' fall from the height of their prestige, following some thirty main characters and over four hundred minor ones. Eventually the Jia clan falls into disfavor with the Emperor, and their mansions are raided and confiscated.
In the story's preface, a sentient Stone, abandoned by the Goddess Nüwa when she mended the heavens aeons ago, begs a Taoist priest and Buddhist monk to bring it to enjoy in the wordly world. The Stone and Divine Attendant-in-Waiting are separate (while in Cheng-gao versions they are merged as a same character). The main character, Jia Baoyu (whose name means "precious jade"), is the adolescent heir of the family, a reincarnation of the Divine Attendant-in-Waiting. The Crimson Pearl Fairy is incarnated as Baoyu's sickly cousin, the emotional Lin Daiyu. Baoyu, however, is predestined in this life to marry another cousin, Xue Baochai. This love triangle against the backdrop of the family's declining fortunes forms the most well-known plot line in the novel.