Your suggestion led me to look along China's borders and I found the area represented in the scale model. It's of territory occupied by China but claimed by India, north and south of the east end of the Karakoram range. The borders in this region are shown in red rather than yellow to indicate the dispute.

The Indian name (or Uighur, apparently) for the main area under dispute is Aksayqin Hu. If you look at a map you'll see that there are three such regions like this. A smaller one to the south is part of the scale model. A third one father west is not: the valley directly northeast of K2. Presumably it is so inaccessable in the first place that it's not of concern to the Chinese planners.

The whole area is extremely desolate. There aren't many hi-res shots of the border areas. I've included a link to about the only thing more interesting than bare dirt or ice: a hilltop fortifcation. To the east of it one can see a few groupings of artillery positions (without the hardware).

Still, this doesn't tell of what the purpose of the model is.

A couple more observations about it:
- Its dimensions are almost exactly 700 x 900 m
- At first I though that the grey-colored regions of the model represented those areas that area accessable by graded roads. This appears not always to be the case. One theory: all the trucks parked next to the model brought in recruits who are, centimeter by centimeter, in the process of painting the whole thing something other than the red it is made of.

Added 21 July
Here's what, for example, Wikipedia has to say about Aksai Chin
Wikipedia article on Aksai Chin