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Just because you don't understand the difference between Chinese and Japanese doesn't make it more authentic. People would be speaking more English in Hong Kong than Japanese. If the game took place in France, I wouldn't expect everyone to be speaking German.
Were this game to make sense, Ryo would most likely be speaking more English (assuming he knows any) in Hong Kong than Japanese. When he got to Mainland, he would've been completely fucked. Just accepting that these villagers in a foreign country speak Japanese (or English) is a little ridiculous. Language should have been (or in sequels should be) an issue that Ryo has to deal with and overcome. Eating and going to the washroom would make sense too. And don't even get me started on why Hong Kong's major districts are mere steps from each other...
Admittedly, these weren't issues for the first game. It was a small town in Japan, so naturally everyone spoke Japanese, and getting from point A to B was feasible with walking (plus one bus ride).
I just think that since the Shenmue series prides itself on being realistic, Ryo should be forced to deal with reality, at least to the extent of the blatantly obvious.