I really am not surprised with your problem, the Chinese especially seem to want to have as many tools as possible to ascribe retribution, even if it is undeserved. Your problem is a rather common one. You go on, do a good jobn, I assume anyhow, and they lie and deceive you.

The truth is that teachers in this situation should talk to someone in the foreign affairs office, though little good it will do. In truth, if they lied, that means they broke the contract, and have no right to withhold a release letter. I would let them know this, and that if they dont give "you" the release letter that you deserve under the law, you will blacklist them. Believe it or not a school does not want it's good name, if it is good, or untarnished, to become tarnished. Threaten them, instead of taking their threats, and be loud and vocal about it. Also, get in their faces and demand, demand, demand. To be honest, in China, the one way to get what you want, if all else fails, is to be a total pain in the ass. They will give you the release letter just to get rid of you. If your a big enough pain in the ass, instead of just crawling away with your tail between your legs, I'd sure give it to you, and I'm stubborn as hell. Deep down people who are wrong usually know it when its a wrong of this nature.

In the end it all depends on how much you want to stir the pot, and stand up for yourself, or take it lying down. Believe me it will work, however it will require some work and effort, but you'll be amazed at how much not doing what they expect will get you. Plant yourself in the middle of the room, yell, don't let the boss work, talk to parents, students, be a pain. Make it so they actually call the PSB, than explain your side to them when they come. It's all about being an asshole and a pain.

As for legal recourse, I would say you need not bother. The system is heavily tilted towards the Chinese, it is their country after all, and they are quite racist in their application of the law, usually. You will be lucky to find any satisfication going through legal channels, so go through the asshole channel instead. The way I look at it is that hey, they took you there with their lies and bullshit in ther first place, so just wallow there a while and see how they like it. Hope this helps, and if not, sorry.