I wouldn't say there is an "oversupply" of SOs but it looks like there is a sufficient number of them. I think what you were told a few months ago was based on the prediction of Cathay's need for SOs in the near future - an incorrect prediction obviously.
I highly doubt Cathay wants an all local airline. I think as far as they are concerned, it doesn't matter where you are from as long as you are on the local package. As for why they are only taking in local ab-initio - my best guess is it's easier to deal with in terms of Visas and also since the 14 month training period is no longer seen as an issue as there is no need for SOs to join sooner rather than later.