Noah Smith gets much right in his argument as to how China managed the huge property-bubble deflation in a "painless" way, and why it's a little silly to say that Beijing managed to deflate a massive housing bubble at no cost. The key point, as he notes, is that whenever China's faces an economic shock, Beijing "uses its direct control over the banking system to push banks to lend more."
What's more, contrary to some of the more dizzy comments to which his essay is a response, China is not the first country to have figured out how to manage adverse economic shocks by setting of compensating investment bubbles. Many investment-driven economies have done the same, most notoriously the US in the mid 1920s, Latin America in the early and mid 1970s (in response to the oil shocks), and Japan in the mid 1980s.
What this means in practice is that the system is not allowed to adjust. Each economic shock is countered by setting off a new investment bubble. For example the post-2009 collapse in China's current account surplus (from 10%of GDP to 3% of GDP) was balanced by inflating an infrastructure bubble.
At the time this was hailed as a brilliant move by Chinese and (especially) foreign economists, although today many Chinese economists will tell you (mostly in private, but occasionally even in public) that this was a mistake, and was the beginning of China's debt problem.
The reason is that if China had been severely underinvested in infrastructure, balancing the contraction in trade with an expansion in infrastructure investment would have been both clever and sustainable, but by 2009 China already had almost as much infrastructure as it could productively absorb, and so the surge in infrastructure investment was decided on not because China needed more infrastructure but because a slowdown would have been more disruptive than China could absorb.
Consider what happened next. As China tried to bring infrastructure investment levels down in the mid-2010s, it could only do so "without pain" by setting off what turned out to be the last stage of the property bubble. It did this in 2015-16 by eliminating many property purchase restrictions, lowering minimum payments, reducing mortgage rates, and forcing banks to expand mortgage lending (often in spite of growing concerns among banks).
These policies, not surprisingly, set off a new wave of surging home prices and expanding property development, but this couldn't last long, and when the property sector, gorged on almost unimaginable levels of debt, began its sharp contraction in 2021-22, Beijing once again responded by setting off an investment bubble in another sector. This time, as Smith notes, it set if off in the manufacturing sector, with the decline in property investment matched almost dollar for dollar with an increase in manufacturing investment.
Once again, if China had been severely underinvested in manufacturing, this would have been a great move, but because at the time it was already over-reliant on a very large manufacturing sector (even larger than the property sector at its height) and suffering from excess manufacturing capacity, the result within 2-3 years was massive increases in excess capacity, severe involution, and an uncontrollable surge in the trade surplus.
"So what?" some of the less historically-literate might wonder. If every time an investment bubble contracts, and the authorities can negate the economic impact by setting off an investment bubble in another sector, shouldn't they keep doing it forever?
Yes, if they can but, for what should be obvious reasons, they cannot, and the longer they postpone the adjustment, the more costly it is likely to be. The problem, of course, is that each bubble has to be bigger than the last to keep economic activity from slowing. We can see this most obviously in the acceleration in the growth of the country's debt burden, already the second highest in the world (after Japan's) and the fastest-growing in history.
To the extent that debt funds productive investment, of course, rising debt should not translate into a rising debt-to-GDP ratio, but in an economy in which nearly all debt funds investment, and very little funds consumption or transfers, many years of a rapidly-rising debt-to-GDP ratio is pretty strong evidence that the investment is increasingly unproductive.
Among other things this means that a bubble-replacement strategy can look very clever in the short term, but it can only run on as long as growth in the debt burden can accelerate.