What if China Sells All of Our Bonds?

I get these occasionally, “we owe money to China” or “what if China sells off all of our bonds”.

I think the first part is much more complicated than simply “we owe money to China” and can explained walking through why China owes Treasuries:

1. We buy goods from China ABC Co.
2. Before we buy we need to covert dollars to Yuan (CNY), so we sell USD and buy Yuan for the transaction
3. Ultimately the above transaction arrives on the currency market and puts downward pressure on USD
4. We are net importers of Chinese goods; as a result there should be more supply of USD relative to CNY, lowering the value of USD/CNY. 
5. Except there is no downward pressure because China’s Central Bank intervenes and buys those dollars
6. So now what does their Central Bank do now?  They obviously want USD or wouldn’t have purchased it, so they invest in the safest USD asset around – Treasuries.  

That is probably an oversimplification, but what I am getting at is that we “owe” China money due to trade.  Would they sell our bonds?  I don’t know, maybe.  So what?

1. If they are selling, someone is buying.  Given where interest rates are there is plenty of demand. 
2. This would put downward pressure on USD, making our exports more competitive.
3. Given their large holdings of Treasuries, why would China have a “fire sale”?  It would crush exports to their largest (or second largest) customer and harm their own central bank balance sheet.
• Note #1 assumes this is done more orderly than just dumping all $1.5t or so Treasuries on the market.

Again, this is an oversimplification and I am certainly missing a few steps.  Further, I will admit this is above my pay grade.  I am just trying to outline that it is much more complicated than “we owe China” and if they do sell our bonds it could yield positive benefits to our exports.