If you wish to implement a dynamic drop down for this yourself then you are welcome to do so, our themes are not encrypted so there are no restrictions which would prevent you from customizing the theme to suit your needs.
Correct, if you select China currently, you'll still get the pre-determined States or list of other States along with any added (if you happen to leave that field on your ad creation form). ClassiPress has a custom forms and fields functionality, so if you don't wish you use that field at all then you don't have to. Alternatively, if you're using the theme for multiple countries, you may wish to consider a
WordPress multisite setup in order to allow each country its own allocated subdomain (thus allowing the display of only relevant countries/states). Thanks.