I wonder: if accurately reported, does this objection signal that the USA thinks commercially-available encryption isn't sufficient to prevent Chinese spying?

I think it may be more that commercially available encryption is not being used widely enough, or in a strong enough form. You can use 4096 bit RSA keys, but not many people do.

Would it really be feasible to encrypt/decrypt all data going over such a large link? What kind of latency would that add?

Surprisingly low latency, since you can parallelize. It would be expensive, but not THAT expensive. You would also want to pad the traffic to complicate/eliminate traffic analysis, but all of this could be done outside the hardware.

It might cost more than buying US equipment, though. Although you could add it as you turn up waves, so not that bad upfront.

Is it practical to encrypt the entire cable as part of the interface? Or are you referring to each application encrypting itself?