By making convertibility to Yuan illegal. This is trivially easy to do and enforce, making the entire Bitcoin marketplace a black market for any transactions on the mainland. So your life would get real hard real quick the moment you try to turn Bitcoin into Yuan. Oh, that's ok you'll just do ALL your transactions with bitcoin. Ok so any shop owner that makes it even slightly known that they take bitcoin will be arrested. Too easy.
Forget big C communist ideology at the state level, you mess with provinces and their ability to collect money and you'll go down hard fast.
More likely society evolves in the face of bitcoin to integrate or at least mitigate it rather than fight it, just like music delivery is chiefly now by streaming subscription services rather than album sales.
Go try and turn your Bitcoin into cash and then tell me how true this statement is.
Also I do local bitcoin transactions just fine thank you very much.
Therein lies the rub and the crux of my point. A government WONT LET IT see enough adoption that you can subvert the sovereign monetary system.
I think you underestimate how big of a deal it would be to move 100% of commerce off of the USD. Nations go to war for less.
It's a bit silly to come in and dismissively say "the state will regulate it anyway" when the whole point of the technology is that it technologically prevents central actors (like a state) from interfering.
It's a bit like saying "nah, the MPAA and RIAA will shut down filesharing." Nope. They shut down Napster (which was centralized), but BitTorrent works just fine thank you very much and the media industry has fundamentally changed as a result.