I am curious: Your opinion that Chinese fought better that Italian are based on?
War are not fought for deserving place in boardgames, or as source of opinion for liking os disliking other nations, or for their consideration as faction or sub-faction in a game.
If I would design a game on the defeat of the Invencible Armada by the Royal Navy in 1588 should I not include the Spanish fleet as player because they fought very bad and lost the battle, and the war?
Italy fought bad and lost in World War II. They surrendered to Allied. And they had to, Italy was in not shape to continue the war. As a result there was a civil war in wich Fascist Salò Republic at north fought alongside with Germany against southern part of the country in the hand of Allies and of a interim Italian govvernment, with volunteer that fought alongside with USA and UK, most of which former opponents of fascist government coming back to Italy to fight.
And also Salò Republic had some elite units, i.e. X MAS, as also in the Corps that fought with allies there were good units. So the situation in Italy from 1943 to 1945 has been quite similar to those of China in 1936-1945. If China deserve to be a player for that motivation at least Italy deserve to be a player for the same motivation. If the criterium applies to China it should work also for Italy.
However there is more. At start of the war Italy had an Army, an Airforce and a Navy. They were strategically used very bad, with wrong pianification and horrible logistic. Italy lost the war for her impreparation, errors and industrial weakness.
So which is the challenge here? Is to perform better than the Italian high command. What if Italy had acted in another way? What if Italian Navy had keep control of Mediterranean? Moreover presence of Italy gives a further challenge to the Axis: collaboration between Italy and Germany. This introduces a need for negotiation and diplomacy, if played by different players, that is inspired to what really happened in the war. Had Italy and Germany collaborated more had the war another course?
This is the reason for Italy being a player and China only a sub player. Italy may be used by the controlling player in a more effective way because had the potential to do better than Italy Armed Forces did and this is Historically correct. Allowing the same for China seems too much given their situation.
For the fact of switching side you can house rule that if you like. However, you should also house rule the Stalingrad defeat. And the Midaway disaster too. Scripting the game in some way.
History provides the scenario and the starting situation for A&A but each player should be able to play its own game.
There are rules and other things that I do no like in Anniversary but China is ok as it is. Mr. Harris have done a good work there.