China was predicted to take the lead from S Korea in production quite a while back.
Construction costs of new Fabs is in the billions. In addition to the national govt., the local city or province also has to finance and their incentive is jobs and local overall economic benefit. Extensive Fab lifetime costing P&L are run. I would think there would be no construction if a downturn was predicted and I think the subsidies are sunk cost.
If true, their present situation is compounded by reduced demand and fixed costs predicated at high production rates.