It always has to be operated by a sponsor in the state who hold encryption keys and do actual deployments etc etc.
The same applies to Azure/AWS/Google Cloud's China regions and any other compute services you might think of.
There are other less nefarious reasons for in-country storage laws like this. One is to stop other countries from subpoeanaing it.
But it's also so China gets the technical skills from helping you run it.
All the pearl clutching about Apple doing business in China is ridiculous. Who would be better off if Apple withdrew from China? Sure, talldayo would sleep better knowing that Apple had passed their purity test, I guess that’s worth a lot right? God knows consumers in China would be much better off without the option to use iPhones or any other Apple devices. Their privacy and security are better protected by domestic phones I’m sure.
Seriously, what exactly is the problem?