I'm not gonna like, I would like our current situation to end exactly in the same way as every stupid Chinese FUD from the past.
But what if ICO+yuan/BTC trading is beginning of something much more problematic? What if other countries will follow and ban BTC trading altogether?
I know it is kinda overreacting on my part but if China can ban bitcoin trading, then maybe others might follow - and I feel like this is what general public may think too.

My original assumption was that they intended to license/regulate, the main motivation being fear of capital flight. If they tightly regulate the exchanges and enforce strict KYC laws, then they can more effectively enforce their capital controls vis-a-vis BTC. Or at least they could deter some people from using BTC to violate the capital controls.

But you have to admit... this has taken things further than the "ban" referenced in the OP. All of the major exchanges are literally shutting down. And this new report that they might try to block access to the BTC network within China? Crazy if true.

price drop is healthy for the bitcoin, it gives new people opportunity to buy

Well we don't know what's going to happen after exchanges have closed.
But my guess is as well that we will see 2-3 major chinese exchanges with some form license like the US NY state Bit License, It will be highly regulated or controlled, but chinese people will have the possibility to continue trading.ICOs will be regulated as well and my excluded from trading who knows.
If licensing will be no possibility, I expect 1-2 exchanges to reopen in Hong Kong or Singapore. I can not imagine a total ban, even if their is some rumor floating around. People will always find ways to get and trade cryptos.
That was the 4th big shakeout (+30%) this year by the way. And again Bitcoin shows how strong it is. The last days that was some serious selling the market bought up.

It's becoming like the boy who cried wolf.

Eventually when China's bitcoin volume drops to zero, it won't work anymore and become a sad punchline to a joke.

I think so, the most important thing in the latest crash come from people who wants to get profits by sell at the higher rate at buy back when bitcoin fall down, by riding the bad news. The proof of bitcoin market still immature and can be easily manipulated by fud news and old tricks.

Many people who say like that China seem to have made decisions that harm many people, but they again make decisions that only benefit China. This is a conspiracy in my opinion. This trick is always valid and has been used several times with tremendous panic effects for all bitcoin users.

There is always a newbie that will get trapped on the FUD news about China banning bitcoin. Bitcoin price hits ATH, newbies come in. Then FUD news spreads, newbies get scared so they dump. Seasoned bitcoiners buy the coins from newbies. Rinse. Repeat.

at this time, I can exactly say that the panic sellers at that time are all of them dumb enough to believe such stupid rumour without waiting the news to be released and now I wonder how much time they've been crying and probably could flood the entire city with their tears by losing the profit they should've owned.
on the other hand, the FUDster is what make our bitcoin ecosystem got shaken for few moments but fortunately could recover fastly.