I agree with you!
Part of the issue is that cheap debt lets a company like Evergrande, or even an entire sector, pretend that it's growing even when it's no longer producing things of value.
When debt is cheap, I can keep building boats by borrowing money, and even when they fail to sell, I can point to my growing inventory of unsold boats and borrow more money against that to build even more boats. This can basically keep going until someone asks for their money back and nobody else will lend me more. That's when we find out whether the boats are truly worth what I say, and whether the growth was real. Until that point, the fact that the boats are worthless can be disguised. It's even worse if I'm selling the boats to customers who buy up my inventory at rising prices but never sail them, just because they're so confident in the trend of their future value going up. Then even I might not realize that my boat factory is no longer building useful items.
I agree that a bust doesn't mean destruction. The waste already happened, in the long stretch of time where I kept building unnecessary boats. But smoothing out the cycle (and accurately pricing debt) may mean that discovery happens sooner, the pivot to nets happens earlier, and the roller coaster ride is avoided.
Right now I'm watching this happen, not in China, but in Canada where cheap debt is blowing a monstrously huge bubble in the housing market. An absurdly wasteful amount of capital is getting redirected into shuffling land titles back and forth, based on loans and valuations that continue to increase.
Canada is on a path to eventual heartbreak of one sort or another, and to the extent that monetary policy can influence it, the choice is either a large collapse now or an even larger collapse later. I can see that China is in a similar position, and they've chosen a large collapse now rather than procrastinating.
In a feedback controller, we cannot completely eliminate sensitivity to disturbances, but we can move it from one band to another, like a pile of dirt.
It's clear that China has not eliminated the oscillations in their economy, but this is one good example of scooping the summit off of a future mountain of pain, and paving it into the valley of the present.
Debt is one mechanism of boom/bust; another is moral hazard. If lenders are confident that their "risky" loans are de facto guaranteed, they won't price their debt accurately. Here we have government ministers saying that even a 10% correction in the price of housing must not be allowed to happen because innocent homeowners would lose their shirts, and you can bet they'll see to it that we can take on more debt to keep bidding up those boats. In times like this, I do respect the CCP's willingness to look past the short term pain.