In March 2001, Bloomberg News reported that CCIDNET Investment, a venture capital arm of the Ministry of Industry and Information Technology, had become Red Flag's second largest shareholder.

The direct cause of the closure was cited as being the failure of the Chinese Academy of Sciences' Software Research Institute to pay a 40 million yuan subsidy.

The institute cited Red Flag's failure to complete a specific project, and general mismanagement, as reasons for not paying the subsidy.

[7] According to a research manager with IDC in Beijing, its downfall resulted from a lack of brand awareness and sustained investments, coupled with the rise of rivals.

Radio Free Asia (which is funded by the U.S. government[8]) claimed that Chinese internet cafes were being required to switch to Red Flag Linux even if they were using genuine copies of the Windows OS.