It’s a setting you can change. The default is a “quick generation” mode which looks as similar to the world seed/settings as it can without taking the performance hit of actually generating it. But it can either be changed to generate the chunks genuinely out to the render distance (which would be lag hell for 128 chunks) or to only render already generated chunks (like you suspect). Only the latter works in multiplayer though.
It’s a setting you can change. The default is a “quick generation” mode which looks as similar to the world seed/settings as it can without taking the performance hit of actually generating it. But it can either be changed to generate the chunks genuinely out to the render distance (which would be lag hell for 128 chunks) or to only render already generated chunks (like you suspect). Only the latter works in multiplayer though.