If it were so easy why aren't the frontier labs doing it themselves?

Distilled models are worse than the original, so you can’t fully compete. Also, if all frontier labs did that, there would be nothing left to distill from.

Americans live in their own plane of reality, where they play the superhero surrounded by evil villains.

I've been saying the same thing for the last 8 years to my european and american friends. Maybe in another 8 years they'll finally realise, or they will quietly adjust to the new normal where China is no longer viewed as this cheating, dirty and backwards competitor.

Will China still be an authoritarian one-party state?

Probably yes, but maybe by then, so will the US

It is an absolute dictatorship like the Nazi Reich or the Stalin system, only hundreds of times more powerful than either.