[geofft]

All Chinese miners are subject to the government's laws. They don't have to be directly day-to-day controlled by the government for the government to say, "We are applying sanctions to this entity, nobody may participate in helping them move money. Mining a block that involves a transaction from this Bitcoin address counts as helping them move money. Mining on top of any new blocks that involves transactions from this Bitcoin address, and therefore causing consensus to accept that block as part of the longest chain, also counts as helping them move money."

This isn't a China-specific argument: I'd expect that any functioning government could the same. The only difference is that governments without a working national firewall would probably be less willing to spend resources on chasing down miners who connect to Bitcoin peers via VPNs in other countries. It just happens to be true in this case that the Chinese government has a national firewall that they use to shut down VPNs, the Chinese government's international interests are often opposed to the US Fed's, and 70% of Bitcoin mining happened in China's jurisdiction last year.