I'm not sure China is underestimating anything. They had an asset, in the form of millions of underqualified workers, and they've used it, to manufacture cheap stuff. But with increasing automation, that asset was never going to last; every passing year it's becoming easier for other countries to replace Chinese manufacturing with local developments, and I think they know it.

In order to stay relevant, China needs a better educated workforce, but in order to control those better educated people, they will need ever better control mechanisms. I doubt they'll be able to make it work in the long run, so they likely will need to change strategies, but right now it makes sense.