I agree with you, we should not tolerate intolerance. Why should Blizzard have to tolerate someone else's views? They are perfectly within their right to deny someone an association or a platform whose views that they do not agree with.
I expect there is some of both. Fear of government intervention and fear of public backlash in China.
I agree it is very understandable that blizzard would want to be apolitical and discourage divisive speech. The question is what to do once the speech has occured, because now blizzard is in the hot seat where their response can be REALLY divisive.
I personally think the response was overly putative, especially the firing of the hapless hosts. Especially so, given that 90% of their business is outside of asia, and only a fraction of the remainder is in China.
The question remains where customers will accept blizzard drawing the line. They would be equally within their legal rights to restrict streamers, game chat, or out of game speech.