5. If CCP is running the miners they are able to run them more efficiently, since they have way larger budget and can afford free electricity and all that.
6. At this point CCP is controlling Bitcoin network. What happens? If it is not cost efficient for other countries to setup miners to counterbalance this power dynamic, why would they?
Is this idea over-exaggerated and paranoid?
There's no such thing as free electricity, especially not in the context of a government paying for electricity with taxpayers money. And seizing huge business is not really good for China, it might look great in short term, but this means that foreign companies will flee the country as quickly as possible, fearing the possible nationalization.
Even if CCP will control the hashpower, it's not the same as controlling Bitcoin. They still can't break the rules of the network or make a profitable double-spending attack. They could try censoring transactions, but Bitcoin community could agree to switch the mining algorithm to end this.