There should be a penalty for that.
I think best way to balance China theatre is if Chinese player chooses to manufacture 1936 tech, and only have factories producing rifles. Nat China should be able to field a much larger force than the Japanese can field. Like they did historically, but this force would take heavy losses from Japanese divisions, and aren't great on the offense. Also the whole planning your attacks and building up organization and supplies is important. That way Japan can't take Shanghai and blitz all the way to Chongqing like one onstoppable train that doesn't need resupply or one that doesn't need a supply line.
Or they could just properly model railroads and and Japan would be stymied that way...