I don't think it's English language ability...I seriously doubt if most Chinese schools can really judge whether our English is good or not, which in itself is kinda sad and scary.

Indeed! Some Chinese schools will send students with poor English to meet up with new FT's at train stations when they arrive to start their contracts. Then said students will report back to the FAO re whether they could follow what the foreigner had said. Sneaky, but this often happens. If the report is not good, there could be a problem for the FT. Remember that the school has within 30 days of the foreigner's entry date to apply for an RP for him. But if the school doesn't offer a contract in the first place within that time, the foreigner is up a gum tree. The Z will revert to an L, and can possibly be extended for another 30 days within China. It's high time that the system is changed, but it won't be. It's weighted too hevily in favour of the employer.
Linyi University of Shandong operates in this way, as does Hua Qiao Foreign Languages Institute of Changchun.