You don't need to be actively enforcing a rule 100% on everyone. Speed cameras don't cover every stretch of road either.
It's enough for them to place this policy and enforce it when they become aware of violations. Someone reading the slopped paper (or, here, trying to follow a reference) will notice sooner or later.
> Being required to publish in a peer reviewed journal will close off arxiv for many researchers for good. It also defeats the point of it being a pre-print.
You sound like it's impossible for researchers to write papers without slopped references, and inevitable to get hit by this policy.
Even acts that would be criminal in the US occur less in China due to properly enforced fines. Nobody does things assuming they will get caught unless there is a high likelihood of getting caught.
Research and practice has shown that the strongest deterrent is certainty.
Impact = Risk * Probability Occurrence.
If the fine is high enough (risk) , but probability low, people will not do the thing because of the impact on them.