A few fallacies in your post:
- There are only a two countries in the world that build modern AEWC's: China and US.
- There is little need for PLA to operate outside of China territory.
- Y-20 is mass produced.
- There is a limit to the amount of time the crew can work in a high intensity conflict.
- Putting multiple crews on the planes in not a good idea in a high intensity conflict since there is a good chance the planes get shot down.
Y-20 offers a few benefits over B-737: can handle rougher runways, probably more redundancies, more volume and carrying capacity for all kinds of payloads and equipments.
Both you and Tomboy have some points which are correct, but overall it is more correct to say that in general, most nations that produce modern AEW&C aircraft, if they have the choice, would prefer to put them on an airliner/business jet airframe rather than a military transport airframe.
Whether that is E-7 with 737, or Saab's Erieye/Globaleye on various business jets, or Israel's CAEW on a business jet, or Japan's E-767 on the 767 airframe.
Airliner/business jet airframes, whether they are narrowbody or widebody, offer more efficient use of space and have less "parasitic weight" than military transport airframes have (which are a carryover for their need to accommodate oversize cargo, as well as to land in less prepared runways). Airliner/business jet airframes are simply more efficient in that regard than a military transport airframe for things like AEW&C or other special mission roles (including MPA, or ELINT/SIGINT or standoff jamming etc -- and widebody airliners are also preferred for tanker aircraft due to similar reasons).
Furthermore, the "benefit" of a military transport airframe being able to operate in less prepared runways is only partially true in the sense that it can potentially allow more flexible deployments but chances are your AEW&C won't really be operating from such unprepared runways to make use of that "advantage" to begin with, given the amount of offboard support that a modern AEW&C really needs.
For the PRC/PLA, it makes sense to use military transport airframes for their AEW&C projects, whether it is the Y-9 airframe (KJ-200/500/700) or Y-20B (KJ-3000), and that is primarily for two reasons:
- they don't have a modern, domestic airliner/business jet airframe available, but they do have the Y-9 and Y-20B airframes available
- they already operate (or will operate) Y-9 and Y-20B airframes in plentiful numbers anyhow, therefore they can get some commonality of supply/parts/maintenance
The true test of whether an airliner/business jet airframe or a military transport airframe is better for AEW&C roles overall (as opposed to simply for the PLA's unique airframe availability situation), is best posed by this hypothetical idea:
"If the PLA had a modern, domestic airliner/business jet airframe available (such as a 737 sized or 767 sized airframe) that they are able to adopt for military roles, and if they had aircraft of such types in similar numbers to military transport airframes (Y-9 or Y-20B) such that the commonality/economy of scale is equal between them, what sort of airframe would they prefer to adopt for the AEW&C role?"
The answer should be pretty sensibly said to be the airliner/business jet airframe option rather than the military transport airframe option.
HOWEVER -- the fact that an airliner/business jet airframe is more optimized than a military transport airframe for the AEW&C mission, does not mean that KJ-200/500/700 or KJ-3000 are ineffective or incapable. It merely means that if the same sensors/guts/processing of KJ-200/500/700 or KJ-3000 were able to be put on an airliner airframe of equivalent weight class/size, then they would likely be able to derive an even more capable platform off it.
In other words, the PLA's AEW&C procurement and platforms should be seen as a practical and sensible solution where they lack the most ideal/preferable airframe option, but are still able to operate a more than capable AEW&C fleet (both in terms of size, and individual platform capability) by virtue of getting other things right.