I thought this was a Slashdot story from years ago when China was supposed to ditch Windows...so here we are again and China still has no viable homegrown distro. I thought years ago they phased out Windows and used GNU/Linux. Not so. I know a Chinese insider who tells me that the Government handed out bales of cash to develop a GNU/Linux distro of their own and all Red Flag Linux is, is Fedora with a some Catonese/Mandarin. It was a scam of public funds. They really did not develop their own GNU/Linux distro properly. was interested because, in a racist way, I thought--wow, Asians doing GNU/Linux, it must be AWESOME and kick the other distro's ass. Asians are hard working and fastidious and the distro will intall without a hitch and it will be great. Not really. One of the issues with investing in China when it comes to business are corrupt officials and lack of accountability. In China, you pay off the right people, you do what you want--until you get caught and are made an example of for the press. Linus Torvalds mentioned something about how GNU/Linux could not really come out of places like India and China as the peole are far too concerned about trying to survive, and Linux is something that came about 'just for fun'.
Ubuntu Kylin is pretty viable. Ubuntu 14.04 specially localized for China, produced by Canonical in partnership with one of the (many) ministries. By bringing in the experts, you avoid all the problems you cite, and it is open source so a Chinese group can take the drivers seat and salvage any lost pride whenever it is viable.
China is huge and the government is huge. IIRC they have had several customized linux variants in development simultaneously (of which we generally know of Red Flag because it had the coolest name).