Not sure I understand this. I can't imagine an American university telling the international students, you can't play on the sports teams. In fact I can't imagine the need for any delination of "foreign" students and local students. You are a student.
Because China's priority is to promote the interests of Chinese people, not foreigners.
This is merely China's overall economic policy that it has long applied to foreign companies played out on the sporting field.
Probably due to a legacy of being a poor country for most of the last century, China is paranoid that if the playing field was level, China would always lose out to foreigners. This may have been the case one day in the past, but today's China -- or at least in places like Beijing -- this is history.
This sort of a rule in the US I am sure would be treated as racist, xenophobic and unacceptable.
If China would like their domestic athletes to excel, let them play with the world's best.
The rules in the professional football league here are even more ethnocentric: Teams can have a certain number of foreign players (i forgot, 3 or 4) but they can have one extra if one of them is of Asian enthnicity.