Chinese society is quite conservative about sex, or at least it has that appearance. For example, it isn't unheard of to hear of a foreigner beaten into a coma for deflowering local girls. In a country where virginity is prized and sex can almost be like a contract for marriage, that sort of thing isn't taken lightly. In the same way, if Chinese people think their women are being debased (as in porn), they tend to get very angry.
I hear you re: western fear mongers, but some of your stuff is WAY off base. In particular, prostitution is a big business in China -- lots of hair salons (especially near army bases, but anywhere busy), KTV salons (not the ones that foreigners typically go to), and Yezonghui "night clubs" have some sort of prostitution going on. There's a reason why waiters in restaurants are now called "fuwuyuan" instead of "xiaojie" -- too many connotations.