Well, Watanabe is Japanese. I think it's important for the Mandarin to at the very least be Chinese, which seems like an odd complaint when the character is already so "racist," but the character is very specifically Chinese in nature, so it's pretty important to retain that.
I think you could do it so that the Mandarin is kind of a political revolutionary who wants to reinstate dynastic China, and when he flees the country, charged with treason or what have you for his beliefs, he stumbles across a downed alien (Skrull?) ship with the rings inside. He uses the power to overthrow the Chinese government (maybe covertly assisted by the US?) and then uses his power to start a war, accusing the US of imperialism (a valid accusation). It'd be a nice opportunity to work in some neo-colonial themes, and since the Iron Man movies have actually been fairly critical of US foreign and domestic policy, this would tie in pretty nicely with the political realism angle Black is such a fan of. Mandarin's Fu Manchu beard, elaborate dress, etc. could be explained as an aesthetic he deliberately invokes to situate himself in a certain period of Chinese history (and which Stark can jab at periodically, showing that the movie is at least aware of the stereotypical nature of the character).
But yeah, fucking fanwank over.










