Google is blocked in China so naturally they'd need a Chinese alternative, with everything going on it's easy to fear monger but people need to chill out a bit. Locale is probably one of the least intrusive ways to determine location, using GPS would probably cause an even further problem if people realise that there's a backdoor to avoid location permission

Any company that markets/releases in China and relies on some google service (maps/safe search/safety net/google sign in/firebase/etc) need to find an alternative, not because everyone is on the Chinese payroll but more often than not these services are business critical.

Wouldn't the locale be set to CN for phones which are in non-china countries too?

Language and Locale are separate preferences. You can mix and match however you want on iOS.

Oh I see. That is where I got confused then.