Get ready for them to dump all those US treasuries they hold...
They won’t “dump” Treasuries. That would be really stupid of them to do.
What they no doubt want is a much higher yield on new paper. Anyone buying US Treasury debt right now knows you’re being compensated far, far too little for holding that paper long-term. Prior to this week, short-term Notes were selling well because there’s a high confidence that the Fed isn’t going to raise rates before the end of 2010, at the earliest.
All the PRC has to do to effect higher yields on US Treasury debt is start slowing down their purchases once the Fed stops their QE purchases and thereby reduce the bid-to-cover ratio on US Treasury auctions. Get the bid-to-cover ratio down to, oh, I dunno — 1.5 or less — and the yields will start going up pretty quickly. This past week has seen BTC ratios over 3.0, which sends a signal to the Treasury “Sure, we’re suckers for your paper!”
Prior to the election in Japan, this might have been a much more hypothetical outcome — but with the new political leadership in Japan, it might just come to pass that China and Japan both want a higher yield on Treasury debt.