I supose it depends on several things:

1) You say short flights. Personally I have been on flights of over 5 hours inside China, so it really depends on where you are flying.

2) Even using your example, which is extreme as it assumes you can get the cheaper fares always, you are talking about a big $100 or so difference for Business Class (a you must of course know the difference between Biz and First in China is often what they have on the specific plane, one or the other and they are generally quite similar). BTW, good TA's in China do get discounts on Biz and First.

3) Being quite tall, I have in fact been stuck in Y a couple of times in China and it can be very uncomfortable, so yes a big $100 or $200 diferential IS worth it.

Lastly, I should note to the OP that many CZ (or contract) lounges in outlying cities are total and utter garbage. The biggest shocker being Chengdu where they spent a int on the airport, but nothing on the furnishings or lounges.