The war entered a new phase with the unprecedented defeat of the Japanese at Battle of Suixian-Zaoyang and 1st Battle of Changsha. After these victories, Chinese nationalist forces launched a large-scale counter-offensive in early 1940; however, due to its low military-industrial capacity, it was repulsed by Japanese army in late March 1940. In August of 1940, Chinese communists launched an offensive in Central China; in retaliation, Japan instituted the "Three Alls Policy" ("Kill all, Burn all, Loot all") in occupied areas to reduce human and material resources for the communists. By 1941 the conflict had become a stalemate. Although Japan had occupied much of northern, central, and coastal China, the Nationalist Government had retreated to the interior with a provisional capital set up at Chungking while the Chinese communists remained in control of base areas in Shaanxi. In addition, Japanese control of northern and central China was somewhat tenuous, in that Japan was usually able to control railroads and the major cities ("points and lines"), but did not have a major military or administrative presence in the vast Chinese countryside. The Japanese found its aggression against the retreating and regrouping Chinese army was stalled by the mountainous terrain in southwestern China while the Communists organised widespread guerrilla and saboteur activities in northern and eastern China behind the Japanese front line.

Why did the Chinese ultimately fail in its counter offensives?