Derrickson didn't hire a Chinese actress because he believed people would have deemed it a racist stereotype

In the end, it doesn't matter people complained that it was racist anyway.

In the article ‘Doctor Strange’ Director Owns Up to Whitewashing Controversy Scott Derrickson discusses the racial minefield behind Doctor Strange:

Derrickson changed The Ancient One from a man to a woman to improve gender diversity in the films cast:

“The first decision that I made was to make it a woman, before we ever went to draft, before we ever had a script,” said Derrickson.

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“At the time when casting was happening there was a lot of anger circulating about female representation, but the term ‘whitewashing’ wasn’t even a term that I knew in the way that it’s used now,” he explained. “I knew it in the classical sense of yellowface, of white actors playing Asian characters. So I wasn’t as sensitive to that issue—but I was aware that I was erasing a potential Asian role.”

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“It was a challenge from the beginning that I knew I was facing with both Wong and the Ancient One being pretty bad racial stereotypes—1960s versions of what Western white people thought Asians were like,” he said. “We weren’t going to have the Ancient One as the Fu Manchu magical Asian on the hill being the mentor to the white hero. I knew that we had a long way to go to get away from that stereotype and cliché.”

But quickly realised that people would complain about an elder Asian lady being a stereotype, so he hired Tilda Swinson:

“As we started to work on it, my assumption was that it would be an Asian character, that it would be an Asian woman,” he said. “We talked about Asian actors who could do it, as we were working on the script, every iteration of it—including the one that Tilda played—but when I envisioned that character being played by an Asian actress, it was a straight-up Dragon Lady.”

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“I know the history of cinema and the portrayal of the Dragon Lady in Anna May Wong films, and the continued stereotype throughout film history and even more in television,” he continued. “I just didn’t feel like there was any way to get around that because the Dragon Lady, by definition, is a domineering, powerful, secretive, mysterious, Asian woman of age with duplicitous motives—and I just described Tilda’s character. I really felt like I was going to be contributing to a bad stereotype.”

In the end, Derrickson didn't hire a Chinese actress because he believe people would have deemed it a racist stereotype.

“Diversity is the responsibility of directors, and I took that as seriously as I could,” he said. “Whitewashing, if you use the term the way it’s used now—it’s what I did with the role. But it also implies racial insensitivity and it implies racist motives and I don’t think I had either. I was really acting out of what I still feel is the best possible choice. But it’s like I chose the lesser evil—and just because you choose the lesser evil it doesn’t mean you’re not choosing an evil.”

Could they have cast another Asian subculture other than a Tibetian for the Ancient One? Yes, absolutely. But with perhaps the exception of a mystic from India, there is another stereotype they were afraid of coming across called "The Dragon Lady."

Fear of a Dragon Lady

Regarding the gender and race-bending of the teacher of Doctor Strange, the Ancient One; Marvel’s higher-ups indicated it was the fear of recreating a known Asian stereotype?—?the Dragon Lady, which they claim, prevented them from making the Ancient One an Asian female actress of any denomination other than Tibetan.

• A Dragon Lady is usually a stereotype of East Asian and occasionally South Asian women as strong, deceitful, domineering, or mysterious.

• The term’s origin and usage is Western, not Chinese. Inspired by the characters played by actress Anna May Wong, the term comes from the female villain in the comic strip Terry and the Pirates.

• It has since been applied to powerful Asian women and to a number of racially Asian film actresses. The stereotype has generated a large quantity of sociological literature.

• “Dragon Lady” is sometimes applied to persons who lived before the term became part of American slang in the 1930s. It is also used to refer to any powerful but prickly woman, usually in a derogatory fashion.

From Panel and Frame: Beneath the Magic of Doctor Strange

A decision of storytelling

The dilemma presented by the underlying story of Doctor Strange (2016), as written is ironically that the Ancient One’s role is, as presented in this description: deceptive, domineering and mysterious. Thus they would be correct in their assumption -- it would be a spot-on depiction of the Dragon Lady stereotype.

• Could this have been avoided? Yes. A more accurate representation of the Ancient One as the benevolent mystic mentor would have erased the need to make pacts with beings of dubious or even infernal origins as shown in Doctor Strange (2016).

• The retelling could have had the Ancient One remaining as virtuous; erasing the need for such a duplicitous version of the character thus preventing the association with a Dragon Lady stereotype.