There were two system in the past: hotels for foreigners, designed to take passports and hotels for citizens, taking only IDs. There has been recent national system upgrades, now Chinese can use passport as identification (although still not universally). Since last year, you can use passport to check in high speed rail stations (maybe still not all of them) without queueing up in exchange for a real ticket. The direction is clear. It is a big IT system with different departments, I can imagine the problem will be gone in the future.

If China really cared about their image they wouldn’t be doing all the things they try to hide.