Can someone let me know if my understanding is correct, in a really oversimplified way:
Different countries/airports use a few different GPS tracking systems - for a bad comparison, in the same way that different countries/areas use different cell phone carriers. ACARs is the system on the plane that allows you to connect into the system and give/get data, like a computer program. ATC can look at its screen and see where everyone is who is close to the airport and direct them accordingly.
The transponder gives off signals at a radio frequency to whoever is around, whether they connected to the GPS company or not, notifying them that it is nearby and if necessary "squawking" an identifying code that tells whether it is civilian/military and what plane it is based on its assigned code.
This is manually done by the pilot - the transponder doesn't magically know which plane it is - the pilot inputs a code that is assigned to the flight. As a result, when used to determine military v. civilian aircraft, it can only positively identify friendly targets but not hostile ones. If the other side receives no reply or an invalid reply, the object cannot be identified as friendly but is not positively identified as a foe. There are many reasons that friendly aircraft may not properly reply.
This is why civilian aircrafts have been accidentally shot down - did not respond or did not properly respond, and I think for a while there were incidents where planes or ships would squawk a friendly code when they were enemies and do a sneak attack. So they continuously reassign codes so that they can't be kept track of. If they want to make sure it's the right commercial scheduled flight, they call the pilot directly, maybe through ATC, and say "squawk XYZ" and if he does, they know it's the real flight. But if it's not a scheduled flight, they can't contact the plane, and if it isn't in any way identifiable, it becomes identified as a possible threat.
Then you have radar, which tracks all planes in the area, but can't determine much except size and direction. Used primarily for military purposes, and less sophisticated. It's purpose is to see planes coming at us, and if they can't be identified, to take action. It is also used as a backup in case there's a problem with the more sophisticated ATC systems and they need to see if planes are close to each other.
If a transponder/ACARs fails, this normally isn't a huge issue, except maybe in a war zone, because they can still use radio communication to let everyone know who they are and where they are, like they normally do. They just call in and say "I lost my transponder, this is my altitude/coordinates, let me know when it's okay to land/where I should go in the meantime to avoid other planes." This is how we did everything before modern tracking technology. Pilots seem to regularly report this info anyway - they don't just rely on tracking data.
It sounds like China used a different company than most in the area. The flight programs had the ability to dial into both systems - maybe like how a cell phone can attach to another carrier's tower if yours is not available? So it can turn off one and switch to the other so that China can see where it is on GPS as it enters Chinese airspace. Turning off the transponder sounds kind of like turning off the radio - if you don't need that communication at the moment, you're just adding to the static.
The point I'm getting at is, pilots don't usually use the transponder as a primary means of communicating their whereabouts, and can use different computer programs coordinate with ATC. Most communication will be via radio and not dependent on these systems (although is the radio direct from ATC To the plane dependent on some sort of internet type system?). There is no one global system, or one way to identify an aircraft. Everything is voluntarily and done for the efficiency of air travel - we used to have air travel without these systems. They choose to connect to the GPS in order to coordinate with ATC, but ATC isn't just supposed to keep track of every plane in existence - it's supposed to work with pilots to determine who is nearby and keep them apart until they prepare to land. It's not a military operation. They are not responsible for being able to track every airplane, and there are backup systems, but they aren't there to take into account a pilot who is being unresponsive - mostly because if the pilot/crew won't respond and use any of the systems, no one can be of any help - at that point it's a military issue. No one has ever bothered to develop a way to track totally disabled planes, because it's so unlikely to happen in a situation where it could make any difference. They rely on the pilots being cooperative, and if it's a situation like hypoxia or those pilots who overflew their destination by hours without checking in, then the tracking systems would still work so they can send someone to go look. For the pilot not to respond and all tracking to be disabled, it has either become an issue of demand-less hijacking or military attack necessitating a shootdown, which is extremely rare, or the plane has crashed/exploded and no one can do anything but look for the wreckage.
The military uses the radar to make sure no one is attacking, but it has a limited application. Things not flying at us are not a security threat - so we don't just have some global system to keep track of rogue planes. Each country looks for some unidentified aircraft entering its territory, scrambles jets if they have them, and tries to determine who it is. If that isn't possible, it gets shot down, although because we're not at war a lot of countries would probably be hesitant to assume its an enemy and risk killing civilians. The U.S. obviously has a history of recent conflict and would probably shoot a plane like that down. I don't know if every place would, especially if it wasn't zooming towards a city.
I think the reason this hasn't been made clear is because no one talking about this seems to really grasp the different technologies and is shocked by things that the investigators see as totally normal. They aren't shocked by the fact that a plane can avoid detection or a transponder can be turned off - but they want to know why. The stuff we see as suspicious v. what they do is probably largely different. Most people aren't trying to analyze the ACARs stuff outside Websleuths because they don't know about it and conflate all tracking processes, as does the media. So Malaysia gives out basic information about what data they have and when they lost contact, but it isn't going to give a full analysis as to how the tracking systems differ and all that. It's too technical, and they'd have to get aviation investigators to talk, which isn't really their style. The report will go into detail if this ever resolves.
I'm sure CNN could get an expert to explain this, but it seems to have little interest in lengthy accurate explanations that don't lead to clear, alarming conclusions.