Warren, there is no "security" for foreign teachers in China. It doesn't even cross their minds. I know it's a hard thing to accept- it certainly was for me- but it's the bottom-line truth.
Foreign teachers are simply a tool for making money, to be cast aside when no longer needed. We don't get tenure, and we don't get pensions or other retirement benefits. There may be a few exceptions to this (none I've heard of), but they'd have to be very few and very exceptional.

The hairs on the back of my neck stand up when I hear words like "sense" or "logic" applied to China. You're not going to find them in China, either...at least not from our viewpoints. If you try to apply them, you're only going to hurt yourself.

one will end up perpetually destitute.

May be...although I've seen lots of folks pull it off. Most of them work summer camps, or short-term training-center gigs, or do private tutoring to get through the summer.
Either way, the schools simply don't care. They want us to come in and do our 10 months, then beat it before it gets beaten for us. Some will graciously extend our Residence Permits if we've agreed to come back in the fall, but precious few schools are going to pay us for not teaching anything.

There's no shortage of real scams out there to talk about. This just isn't one of them. This is standard practice, and for once not completely unreasonable. We can either take the jobs as given, or not. Survival is our own responsibility, not the schools'...