If China severs the peg to the US Dollar, that will be one of the key road blocks to the US moving to a policy of printing it’s way out of it’s debt. Look for inflation to rise if this happens.
If the yuan/dollar peg is severed, the yuan will increase in value compared to the dollar.
1. This will instantly devalue the current holdings of dollar-denominated debt that the Chinese are holding, which is one of their largest balance sheet assets.
2. Chinese-made goods will increase in price, which will decrease the demand for their goods. They are an export-driven economy, and a significant decrease in their exports will hurt them far more than it hurts us.
3. A higher-value yuan, however, will be able to command greater purchasing power in dollar-denominated assets that the Chinese need, like foreign oil.
I think the Chinese eventually have to let their currency float, but doubt that they will move to a float in one step. Look for them to try an intermediate step like adjusting the yuan/dollar peg point in order to test the results first.