The '\u0158' character is Ř. It comes from Czech language, so you can’t write it with GBK. The code tried to use your platform encoding to write some files.
Instead of trying to edit Setuptools, you can set the PYTHONIOENCODING environment variable to make UTF-8 the default.
I don’t know what file was written, or what will use it later. Of course, when it’s used, that tool has to understand UTF-8, too.
Just to make sure: it should be possible to update Setuptools as far as 68.0.0.
Please also see the previous thread. The overall problem is fairly complicated.