I think it would be reasonable for China to allow dual citizenship for the few Olympic athletes.
Why only limit to athletes? Olympic or not.
They should allow all China-born ethnic Chinese to keep their citizenship if they choose so. They can also accept foreign nationals of non ethnic Chinese to be naturalized based certain conditions (merit, heritage, etc.)
If there were any concern about political risk, they can at least follow India's NRI (Non-Resident Indian) model. That is, people holding foreign passports or of dual citizenship are not allowed to hold political office or other sensitive positions.
The current no-dual-citizen policy/law is rooted in historical insecurity or victimhood or resource-poor mentality. Your people is your asset, not your liability. If they have no intention to give up Chinese citizenship, why force them to just because they choose to hold foreign passports? You're giving up at the first sign of competition. People hold foreign passports for a variety reasons, mostly pragmatic ones.
In any case, they need some fresh thinking.