The simple and straightforward answer is that modern institutionalized forms of democracy are perfectly viable in a nation with a large population, even a population as large as China's. However, there are a number of different issues to discuss to get to that conclusion, so please bear with me.
First, we should go back to Aristotle's distinction between polity and democracy. Aristotle listed out three major types of government — rule by an individual, rule by an elite, and rule by the masses — and each of these three types had a virtuous and un-virtuous form. For rule by the masses, the virtuous form was 'polity', which effectively meant rule by citizens who were well-informed, civically-minded, responsible, and dedicated. Aristotle's 'democracy', by contrast, was rule by rabble, what we might today call demagoguery. In his typology, polity was the best form of government if it could be achieved, because it most closely adhered to the interests of the citizenry and community, but democracy was the absolute worst form of government. Keep in mind the context, though... Even though we think of ancient Greece as the birthplace of Western philosophy, literacy rates were low: less than a third of the population could read and write to any extent, and probably less than five percent of the population were what we would consider to be educated and informed. Ancient Greece was an agricultural society, with the vast majority of the population tied up in farming and animal husbandry. What we call 'Greek democracy' was actually a polity made up of wealthy landowners and artisans, those who came together in the marketplace (agora) and had the leisure time and perspective to discuss things other than planting and harvesting.
A millennium and a half later, during the Liberal Enlightenment, people began revisiting Aristotle's Politics, but they did so with the understanding that literacy rates were rising, and more importantly — because of the invention of the printing press — communication of information was becoming much more widespread. Broadsheets, books, and other printed media meant that even remote agricultural communities could stay abreast of current events and modern advances, and so Liberal philosophy began to consider the idea that a polity of the entire body of citizenry was possible. The term 'democracy' stopped carrying the negative implications it had in Aristotle's view, and became an aspiration: rule by all the people, because all the people now have the capacity to be well-informed, civically-minded, responsible, and dedicated. The emphasis shifted from 'knowledge' (which was out-of-bounds for most of the people of ancient Greece, but accessible to modern people) to 'reason' (which was the capacity people needed to develop to analyze that influx of information). Democracy became the 'polity of all', which is the way the term is used in the modern era.
However, the problem with democracy as a 'polity of all' (as Enlightenment thinkers knew) is that it is slow. In the days of horses and sailing ships, knowledge might spread at the rate of 20 or 30 miles a day, meaning that distant information could be weeks out of date. Further, arguments and debates had to flow through these same channels, so that discussions across a community of people of any size could take months. That simply was not practical for administrative purposes. These kinds of problems led the originators of the first real effort at large-scale democracy — the founders of the US constitution — to adopt a system of institutionalized representative democracy. Whatever one thinks of the modern US political system, the original design was innovative: it used institutional representation both to break up power blocs that could undermine democratic intentions while creating an artificial elite — one whose members were constantly being replaced — that could make decisions more efficiently but still be responsive to the interests of the average (informed) citizen.
In the modern era, speed of communication has increased exponentially, as have literacy rates. There are no longer technical barriers to knowledge except the limitations of the human brain in processing large amounts of data. This is a mixed blessing, of course. Modern information technology has unleashed a torrent of propaganda, lies, distractions, and sheer unadulterated nonsense such as never been seen, and that creates significant problems for the institutions of democracy (problems those in the US have not yet understood, much less found a solution for). But it also creates the potential for a true 'polity of all', by re-institutionalizing a representative system to empower citizens with access to both information and decision processes.
There's no more sense asking why the Chinese government resists this move than in asking why the US government resists it. It is an unfortunate fact that power is sometimes its own justification, and no other reason or excuse is needed. But the creation of a functional institutionalized representative democracy on the scale of China is perfectly feasible, given modern communication technologies. We have the way, just not the will to do it.
