Also, it is now very clear that Chinese people can legally own bitcoin. OTC trade is also legal. So China is not completely out
Yes, China is not completely out. It looks to me like the Chinese government is trying to send a message to its citizens about who is in control. Regulating Bitcoin in a similar way to precious metals is not a bad idea at all.
Besides, what Chinese businessman/woman wouldn't accept Bitcoin "under the counter"? I mean the Chinese already cheat on taxes big time. Not paying full taxes is endemic, and when you have the possibility to anonymously accept a speculative digital gold that "go to da mooon", it would make logical business sense (no taxes, hard currency) and it would be like gambling on a lottery ticket at the same time ("to da mooon").
So maybe you wouldn't be able to buy a coffee in a coffee shop openly with BTC (like in Berlin), but you could probably buy cars, jewelery, computers, basically anything that is relatively easy to trade in a gray market.
The second aspect of Chinese regulation is what comes next. Banning Bitcoin outright seems overly excessive and would be a deeply unpopular move. It's not unheard of for the Chinese government to do things that are deeply unpopular with its population, but the Chinese government is probably acutely aware that they don't have unlimited political capital, and if people start becoming really really unhappy they will be in trouble. So an outright ban is probably out of the question for quite a while.
If the regulatory status quo doesn't last for ever, the other option is that, after a while in the gray currency market, Bitcoin will slowly be phased in to the regular currency market with whatever regulatory headache that requires.
