It's a nonsensical argument, pay it no mind. The fact is that everyone in China pirates all their software, so forcing everyone to upgrade will only result in a spike in piracy numbers, which will make the guys (allegedly) trying to reduce piracy in China look bad. Looking bad (aka "losing face") is a big deal in most Asian cultures. That's really all that's driving this announcement.
In reality, EOLing XP will make no practical difference in China any time soon. The Chinese love XP. I've sent refurbished laptops with clean installs of Win7 to friends in China, and the first call I get after they get it is "how do I install XP?" Anyone who thinks those people are going to give two shits whether MS continues to support XP or not is nuts.