Daniel is experiencing a big road block that the japanese historically did - the war with china is (currently in his case, permanently historically) doing more harm than it is doing good. he has all his civilian factories working on repairing and building infrastructure instead of building more factories or building synthetic oil factories.
Even if he ends the war with china, he still wont be gaining the full benefits of the land he conquered until he can invest in enough equipment, training and manpower for military police.
China will be a benefit to him in the long run, once he has it conquered and secured and can begin his build up towards the pacific war proper, but right now he isn't building up at all, so its quite easy to be unimpressed with the japanese build up. I believe china has combined some 16 factories left from when daniel checked (China has 8 and the peoples republic has 8, if i recall correctly, might be wrong) which will be a significant benefit if daniel gets to take them though. thats a huge increase to his overall factory count, once he can harness them that is.
i wonder if china is harder or easier to conquer if you wait a year into 1937 before starting the invasion