in fact, there was a third possibility: i am a moron.
the subtitles work fine now. i was entering the FONT name into the freetype2 text renderer instead of the FILE name. so instead of entering C:\WINDOWS\Fonts\arialuni.ttf, i was entering only arialuni.ttf. as soon as i realized this, the subtitles played perfectly.
so for anyone who may come across this post in the future looking to figure out how to play chinese subtitles correctly, do this:
1. download a font with chinese characters, such as arialuni.ttf
2. put the font file into C:\WINDOWS\Fonts
3. in VLC, go to Settings --> Preferences --> Video --> Subtitles/OSD --> Text Renderer. in the font field, enter the file name for the font, such as C:\WINDOWS\Fonts\arialuni.ttf
4. hit Save and close VLC
5. open VLC, go to File --> Open File. select the movie file and the subtitle file in the appropriate fields.
6. under advanced settings, select the appropriate Subtitles Text Ecoding. for chinese language, it will probably be one of the following: ISO-2022-CN ; ISO-2022-CN-EXT ; EUC-CN ; EUC-TW ; BIG5 ; or BIG5-HKSCS.
that should be it. the movie should play properly with the subtitles.
one place you can find subtitles for chinese language is here:
http://subscene.com/subtitles/Big_5_code.aspx.
good luck!!!
and dj, thanks a bunch for your help--i wouldn't have gotten it to work without your responses. my apologies for wasting your time with such a silly mistake. peace