I'm glad you emphasized JAPANESE military literature in this claim, because it's pretty hard to swallow in any other context. Basically, IF THEY COULD..., WHY DIDN'T THEY?
For the same reason we have not subjegated Iraq. Just not willing to pay the price and Japan likely hoped that by occupying all the coastal cities that China would just give in or collapse. Everyone always think that wars can be won quickly and cheeply. Then its hard to change course when reality sets in. Why havn't we defeated the insurgents? Certainly its not because they are unbeatable.
Not to argue that defeating China is even remotely accurate in WITP. Operations occur far to quickly and with few losses for the attacker. Certainly being able to drive China back into Chungking in a lightning 3 or 4 month campaign is pretty ridiculous. Hopefully this can be improved in WITPII.