I have a rough cedar (previously painted) siding. It was not sanded. There are lots of rough areas that you can scrape off flecks of the roughness, and it exposes tiny flecks of bare wood. But, should those areas be scraped, if they do not appear to be peeling in any way? Or, should those areas be left alone, and only areas that actually have evicence of peeling be scraped?
the problem with cedar that is painted or stained is that cedar delaminates with age. meaning that the wood fibers separate from the wood and cause the paint coating to fail. If you look at he back of your paint chips you will see wood fibers on them.
with that being said, you should try to remove all of the loose and peeling paint you can. the cracking areas are ready to fail. if you paint over them you will have failure next year. But, you are going to have to repaint every 3 to 5 years anyway so its your call.
Try to pressure wash the peeling paint off, be careful, cedar is a soft wood and it is easy to tear it up with a pressure washer.
XIM makes a product called Peel Bond (i think). it is a high build primer designed to penetrate into the wood and cracks in the existing coating. it helps for adhesion and hides the transitions from bare wood to existing coatings. I think they have developed a similar product that can be applied by brush and/or roller. the older version was spray application only.