It is impossible, IMNSHO, to analyze economics events without reference to their greater context. Multidisciplinary, holistic approaches achieve greater understanding than myopic economic arguments. We saw some evidence of this affliction in the previous post about Munger and Krugman.
In that vein, the following take on China represents the widely accepted view on the "what if China sold U.S. debt" scenarios. It gets the foreign currency constraints. However, itt does not address the international security implications nor does it seek to understand the technical finance issues regarding capital levels and collateral obligations of the PRC.
Military studies, finance, economics, law, psychology, sociology, and science. (in the sense of a determination to gather data and do your homework.)
This excerpt is from the Brookings Institute.
Of course, China could sell off some of its enormous reserves of U.S. Treasury securities. It currently owns almost 10% of the total Treasury debt held by the public. This is slightly less than the percentage held by Japan and residents of Japan, but substantially more than the percentage held by any other country. I'm inclined to think a Chinese sell-off of U.S. Treasuries would on balance benefit the United States. One reason China has accumulated such large reserves is that it has sought to maintain a low value of its own currency, primarily to help maintain a competitive edge in export markets. This policy has helped make China one of the world's great exporters, but it has also hurt workers and producers in the United States and other countries. If the dollar fell in value compared with other currencies I think we would see a faster U.S. recovery, especially in manufacturing. A precipitous and disorderly fall in the dollar could take a terrible toll on worldwide confidence and hence on the economic recovery, but an orderly decline would spark revival in a number of U.S. industries.