Yes it's actually working in China (for now?)
It is. But they made an update exclusively for iPhones in China (something they never do, iOS versions are always the same globally) that changed AirDrop's functionality as a means to cripple the ability for protesters to transfer information via AirDrop to each other as effectively as they could before. When Apple was called out on this, Apple responded by saying that this was just an update that was eventually coming to
all iPhones. It was a nonsense response and now we all get the crappier, time-limited version of AirDrop.
I just set it up on my Chinese Apple ID so yes, including mainland China.
It remains to be seen how this encryption will be implemented in China as Apple transferred the control of their Chinese servers to China so that the Chinese government could monitor the activity of all the citizens. It's currently being controlled by GCBD (AIPO Cloud (Guizhou) Technology Co. Ltd) and the server data has to fall in line with China's strict laws.
Learn about the changes to iCloud services in China mainland.
support.apple.com
Apple has received a lot of flak for this. Their encryption keys for Chinese iCloud data is also stored on the servers controlled by GCBD. Obviously, this new E2E encryption method has locally stored keys, but I remain unconvinced that things are now more private in China. China wouldn't want this at all.