Yeah, they can probably sell the knives at a higher price, but then there's the fact that their possible avenues for distribution are getting more and more limited as people and vendors find out quicker through the internet. So, they will either have to drastically lower the prices of a model as people find out and vendors start refusing, or just stop making that one model and make another. My point is, they rely completely on external variables, and due to the other factors (Such as company value, investors, etc.), I don't think they would do much worse with a product of their own -- at least not to a degree that makes it worth it.
They are hurting other brands at what is most likely a profit margin that wouldn't change all that much with their own products and designs. There's more to a company than just the direct earnings from a sale as well - for example, sales can increase the value of a company, get them more investors so they can improve their products, or make more products, etc. (Artificial value that, depending on the actions of the company, can increase the real value.) Contracts, deals, advertisement and so forth are things that can bring value to a company, but not a company with no name that makes stuff that tries to blend in with the products from another company.
You are making some semi-tangible assumptions, but a lot of your assumptions just aren't pertinent. You're thinking like the company in China is a company in Iowa that has elected to be a black market company as opposed to a publicly traded company on the up and up.
A major part of china's economy is exporting to other countries, especially the United States. Think about how much we look down on China made products, especially knives made in China - they're worthless in this market, not matter how good the fit and finish is. I don't really know of any exceptions. Even when a well known brand elects to outsource production to China, the prices and reputation drops dramatically. A Chinese brand of knives is not going to enjoy any kind of brand loyalty or increased value like you're assuming in the first place.
Now, consider that China's export isn't really knives here - it's labor. China has enough production capacity to take over Spyderco's entire production and have room to spare. They have so much production capacity and labor surplus that sites like Ali-Baba are now offering to do 1,000 piece runs of just about any product you can imagine for smaller businesses in the hope of replacing some of the larger orders that aren't being placed due to other emerging markets competing with them and global markets in Europe and America losing some of their consumption power in the last 10 years. They are already selling as many China made knives as the world wants to buy, or will want to buy in the forseeable future (which is probably more knives than every other country combined. Kitchen knives, cheap folders, box cutters, carpenter knives, and every other kind of blade imagineable is produced in China and marketed under so many different brands that I couldn't even begin to list them). They're already selling as much China made everything as they can in fact. THe factories in China were built to meet a demand that is no longer there at a time when they had zero competition - there are factories sitting idle, and workers laid off because there are no orders. Since they can't create a demand for China made goods, one other option is to satisfy part of the demand for American made goods with knock offs. Even if there was no greater markup (there is though, which is why China has been exporting knock off T-shirts, purses, shoes, DVDs and everything else of value for years) it is still a viable business plan to increase production. Sure, Blade Forums members buying from Ebay catch most of the fake Spydercos, but is Ebay really the best outlet for knock offs? I would hate to know how many stores buy the knock offs for 1/6 Wholesale and get away with selling dozens, or how many people are selling them at flea markets alongside knock off Louis Vuiton and Gucci. Somebody is obviously buying them because Ali Baba is listing many more than Ebay.
Finally, copyright infringement isn't a problem for a Chinese factory. Just like how a criminal in the U.S. can create a convoluted network of business fronts and subsidiaries to avoid taxes, launder money and create covers for other criminal enterprises, China is using many of the same tricks. These products are made alongside legitimate products that you wouldn't think twice about - your Fake Spyderco Southard could be made in the same plant as your G.E. carbon monoxide detector and your flash light. As many have noted before, some of the knock off factories have been contracted by the same companies they're ripping off in the past. Besides the factory being a contractor for a subsidiary of an LLC that is part of a Conglomerate, and the fact that China is still mostly a communist country that makes their own laws to facilitate any kind of corrupt practices they wish to harbor, their true interests aren't really clear.
Since we're such a major importer of Chinese goods, you'd think that it would be in their best interest to protect America right? That's actually true from an economic standpoint. China controls their own inflation and the price of labor by stockpiling their money, and also by loaning it back to us. However, at the same time they train hackers to target U.S. companies and our government, and they have long been suspected of playing a part in counterfiting extremely high quality American 100$ bills. Introducing counterfits attacks people's confidence, and confidence is one of our only remaining exports. Someone just said that all the knock offs are keeping them from buying more Spydercos - other countries are deterred from investing in U.S. bonds because China holds so much debt, and counterfit money weakens the strength of the dollar. In the short game China needs a strong America to continue the current trade deficit and build their global power, but it's clear that they're positioning for a much longer game that is harder to identify. Since they can't increase our demand for Chinese goods, why not move in to Military protection and consumer confidence, both of which have made the U.S. a stable superpower in the modern world.
The fact is, I don't know if anyone here is uniquely positioned to explain all of the variables that make producing knock offs a viable business model for a section of a factory in China - it's more complex than you can fathom, and odds are the government plays a role (they have their hands in everything over there). Even if the government wasn't involved, attacking the confidence of American companies does benefit the Chinese economy (at the same time it hurts the power of that company to outsource production to China, but overall it moves the perceived quality of the American products to a closer level to that of its Chinese counterpart). Even with all the extraciriccular benefits, they still have a wider markup on the knock offs, and it's part of the market that they wouldn't have access to with another product labeled "made in China".