Them selling off their T-bonds won't change the amount in circulation. The gov't uses T-bonds and the like to control inflation - buy up some from the public to lower the money supply, less inflation, sell some to increase the supply and increase inflation (to avoid deflation).

Of course, such a vast liquidation would lower the price of the T-bonds. I'm not completely sure on how exactly this would effect the dollar.

But a crash of the dollar would make all their exports worth less, and make American exports more attractive to other countries (I think).

In light of this quote it's probably a bit inflammatory to title the thread "China threatens..."

China is making the point that it could retaliate, if necessary.
China has pegged its currency to the dollar, which is not free market and helps their exports unfairly.

I need to crack open my econ book again...

CR