China's government is choosing not to bail out its struggling real estate sector, instead opting for a systemic redesign to reshape its role in the macroeconomy.

For years, China’s embattled real estate sector has been framed as a terminal drag on the economy – a deflating bubble that policymakers are unwilling to rescue but unable to ignore. That framing misses what is happening. The absence of a large bailout is not so much a sign of the leadership’s indifference as a deliberate choice. It points to something more consequential than short-term market stabilisation: a systemic effort to redesign the sector’s role in the macroeconomy. The old development...