Before the next nerdfight erupts, making the rest of us wince and avert our eyes out of sheer embarrassment, let me say that reasonable people disagree as to who enjoys more leverage in the Sino-American currency vs. trade judo grab.
The Chinese swap huge amounts of their Yuan for the Dollar in order to keep the Yuan priced artificially low against other currencies. This lowers the prices on their exports, which raises their trade surplus tremendously. Corrupt and backwards internally, they are fundamentally dependent on this external cash. For what happens to authoritarian regimes when the bottom falls out of their economy, see the USSR.
The dollars they purchase have to soak up some sort of asset, so the Chinese put them in Treasury securities. While it is true that if they were to stop purchasing or start selling these securities, it would put pressure on the interest rates of the vastly larger economy of their prime debtor, but it would also have a direct negative effect on the exports that they are so dependent on. The debtor with its massive economy and interest rates hovering near zero can absorb this punishment for much longer than the much weaker creditor can.
It's their trade policy that drives their currency policy. Their debtors are simultaneously their best customers. The kicker is that there are other plenty of other trading outposts in town where the local trillionaire can run up his tab. Put another way, imagine what would happen to Wal-Mart if it stopped accepting plastic and started raising its prices across the board inexorably. Customers would flock to myriad other stores, and Wal-Mart would lose, and lose big, in the end.
Ultimately that's why it's the demand side, not the supply side of this global equation where the real leverage lies.
The Chinese have every incentive to keep things as stable and quiet as possible in their neck of the woods (Taiwan, North Korea). Whether it's tubes and refugees pointed at Seoul or the collapse of external trade pointed at Beijing, both actors have a vital interest in maintaining the status quo. The South Korean military has the continuing honor of bearing the greatest burden for its nation's interests: this is in fact how it should be, and why Cheonan will not be allowed to derail North Korea's slow motion collapse.
� 1998 -