I can read Chinese but I left China a couple of decades ago, so my source is probably as good as yours.
In general I think the bigger players are definitely more interested in building their own OS, either Linux based on something different. But I'm not really familiar with the scene. For such discussion I recommend V2EX (Google translate works fine).
The government insight is correct. The Chinese government, and especially local governments like the provincial ones, actively welcome competition in hot things such as AI or EV.
The central government encourages over-competition because -- first, over-competition encourages fast iteration, so technology advances very fast, literally in a few years; second, it keeps the price to bare minimum, which also has the benefit of pushing out foreign competitions; third, eventually, a few big players will emerge as the winners, and then they can compete internationally.
The local governments encourage it too, because -- well, if my fellow provinces have something good, I better have one too. It's good for employment and tax.
The downside of over-competition is that eventually most of the smaller players get washed out, and "human capital" depreciates faster (the Chinese jokingly call workers "human minerals"). But I guess they believe the upsides are bigger than the downsides.
Regarding Huawei, it is in a very good position to fulfill the "localize-computer-infra" policy the Chinese government started to implement since maybe 10 years ago (remember the de-IBM, de-Oracle stories in the banking sector?), because it can offer a whole range of solutions from the OS to Database to hardware. No other companies can do the same. I'm sure the Chinese government wants more competition, but the other players simply are not competent enough to challenge Huawei at the moment.