Obviously you've been honest and have offered good professional services to your employer but sadly, they are not honest to you and your dear wife. It sounds strange how a "reasonable" institution should tell lies to responsible people ( a couple) in this case. If your "Z" visa got expired while still actively teaching, it is but crystal clear that your school had to renew it for. If on the other hand they do not need your services any longer, they should not put you in a fix. At your level you have a better understanding of the immigrations rules in their country than most or all of them because those rules have their ugly guillotine on you. You should let them understand that even if you have to go back home to work out a visa in a Chinese embassy, they have to secure for you a valid visa to travel because you were here serving them; they should understand. If they still remain obstinate, then you insist on the point that they should return into your passport the "L" visa they changed into a "Z."