I am using VLC 1.1.10 for playing english movies.
I've tried to use it for a movie with chinese subtitles, but the subtitle is showing up as squares. After searching in the internet, I finally make it to work.
1) Go to "Tools" menu
2) Select "Preference"
3) Select "Subtitles & OSD"
4) Change Default encoding to "Universal, Chinese (GB18030)"
5) Change the Font to "PMingLiU".
6) Close VLC and start it again.
This works for me... It might work for you as well... ;)