...and what if they stop buying our bonds? I believe they are now the second largest investor in T Bills, behind Japan, but ahead of Great Britain.
The easy answer is that it would probably push interest rates up a bit. China is still accumulating treasury debt, as of the last TIC report.
The more complex question is what would Japan do. They have plenty of cash (both ready yen and dollars) that they could buy bonds with. In fact, they could easily buy all of China's Treasury holdings with cash on hand were China to decide to dump them on the market. My guess is that if China did dump (and were simply dumping and were not trying to crash the market with more complex financial maneuvers) that Japan would probably (but not certainly) make large buys since they have a lot invested in our Treasury debt. But who knows? Japan has actually cut its Treasury position just a bit itself in the last few months, while China is still accumulating Treasury debt.
But the fly in the ointment with all Japan/China scenarios is the huge trade between the two. The Bank of Japan is probably spending more time working on risk scenarios and internal planning with respect to China and the yuan than they have ever done in the past. Their traders is probably already loaded for bear if and when the Chinese float the yuan -- the real question is how will they play the game? Throwing a flight from dollar reserves by China into the mix is probably straining even the the think tank at BOJ.
I think I will stick with the easy answer "interest rates likely go up"; there are too many variables in flight scenarios to make any reasonable guesses. I hope that our own treasury is working on scenarios; some of our debt sales lately haven't attracted all that much buying interest, and I assume that this has caught someone at Treasury's attention.
In interesting contrast, the BOJ actually had a little misfire the other day when they went to go buy back JGBs and they didn't find as many out there to buy back as they wanted. It seems that the market is more interested in holding Japanese debt (and at some extraordinarily low rates) than it is in a cash position. (And Moody's has the bizarre position that Japan's sovereign debt is somehow much worse credit quality than the U.S.'s -- strange how the market doesn't agree.)
If they stop buying our bonds, the trade deficit would fall, as the yuan woud appreciate against the dollar. That's the reason WHY China buys our bonds -- they need to do repatriate all the dollars they earn from exports to the US.