To Live was banned in mainland China. IIRC, Zhang made two or three movies before Hero which the government wouldn't even allowed to be screened abroad. I think the only reason he's stayed out of jail is that the government doesn't want another embarrassing cause célèbre. Remember that, at the time, Zhang was coming off a string of major international art house (Red Sorghum, Raise the Red Lantern) hits and his imprisonment would've caused an outcry around the world.

I think it also has something to do with the contemporary ideological trends, which I only hazily remember. The movie can always be viewed as more a criticism of Maoism than Communism, per se, and Maoism has gone in and out of favour in China.