Bitcoin Forum

According to Wu Xiaolin, the PBOC should be in charge of regulating bitcoin exchanges because the businesses involve certain aspects of anti-money laundering (AML), foreign currency management, and payment settlement. Wu explains the recent inspections were needed, so bitcoin is not a tool used for money laundering purposes. The congresswoman also states she hopes the bitcoin exchanges within the country are compliant with the new regulatory policies. However, she expressed bitcoin exchanges have so far been very cooperative and have carried out self-examinations.

“Bitcoin is a relatively successful application of blockchain technology,” details the translated commentary from congresswoman Wu Xiaolin. “Now different governments and regulators have different options on bitcoin. In China, we defined it as a digital asset. There are other countries considering it as a decentralized currency without legal compensation characteristics.”
Aritcle (https://news.bitcoin.com/chinese-congresswoman-pboc-responsible-bitcoin-aml/)

There is only so much you can regulate on decentralized network. Exchanges have nothing to do with bitcoin just as supermarkets have nothing to do with products they sale.
The part you can control is the distribution of the product. But how can you regulate internet not to distribute bitcoin? You can't just as you cant stop people from sending email or running mail server.

I guess they are more worried about people laundering Chinese Yuan. That can be checked to a certain extent if they have access to the identity of people depositing/ withdrawing from the exchanges. I wouldn't be surprised if the Chinese government (like the US) asked for a data dump from the exchanges.