The issue is that Google's mail servers can't communicate with servers within China, so any user of a Chinese mail service will not be able to send mail to Gmail users (and vice versa). If you are within China using a VPN to access Gmail, Google still can't send emails back in to Chinese machines.

Ah. Seems dumb of them. There are millions of Chinese people all around the world that will be trying to email their family back home. Why block just one email provider? Why try to segregate yourself from the world's email network? It isn't even going to work because what every Chinese person will do is get a tunnel to sign up for the non-Chinese email service (maybe even Gmail!) and it will just further push people to use encryption.

If the Chinese government were shrewd, they would do what the American government does: make using American servers as easy as possible then spy on the contents.

Why block one email provider? Because China isn't a fan of Google. Yes they will be cut off from the world. But if you want to communicate with the Chinese, you will simply use something other than Gmail.

China might have figured out how to read the other major email providers.

If I worked in Yahoo!'s SOC this'd put me on high alert.

So those millions of Chinese people use a Chinese service instead.

Possible because they don't want USA/NSA to read their mail. And probably because they can't force Google to let them read "their" mail.

This is the sort of thing SMTP relaying would be useful for, if it hadn't been effectively shut down by spammer abuse.

I don't see how that follows. Your MX indicates your preference for inbound traffic. It has no relationship to outbound traffic.