#1 majority hashpower is in China. Chinese mines can be controlled or shut down by the People's Bank or the government.
If the chinese can produce something domestically, they do.
Why "import" BTCs for dollars, from foreign miners, when they can produce them locally?
If Chinese production of BTCs can satisfy local BTC hunger (prevents USD outflows) or even be used for "export" (USD inflows), then it's a "profitable" activity for their economy.
Indeed. Personally, I don't see why China producing BTC blocks is so much different than, lets say, China producing rare earth metals. The real question is, how dependent does it make the world outside of China? How fast can production be started up if needed? With rare earth metals, it takes years. So that's tricky, you don't want that. With BTC difficulty can adapt, and miners elsewhere can take over quickly. The main vulnerability is that the difficulty will take a long time to adjust if the hashrate drops sharply. Perhaps that rule should be improved upon?