Elaborate on this part, "float their currency."
China's currency, the yuan, has been sold by the Chinese government at a fixed rate since the mid 1990s. The Yuan is surely undervalued on the world market, and floating it would allow the Yuan to rise meteorically against the dollar. Thus would increase the cost of Chinese imports in the US, and shrink the US trade deficit -- at least in the short term.
But the long term consequences of a Chinese float are worrisome. First off, if Chinese imports become expensive in the US - the prices of almost everything goes up. As China's currency becomes more valuable vs the dollar though - the buying power of the Yuan on the world market goes up. A more powerful yuan makes it easier for China to buy up oil -- which is bad for the US because there isn't enough of it to go around right now anyway.
A floating yuan also means that the value of US treasury bonds bought up by China now also float vs the Yuan, which will force China to start treating those bonds as a commodity. China owns a lot of these - and their selling them on the open market can mean bad things for the US economy.
China is also involved in the world gold market in that the Yuan is tied to Gold at a low rate -- allowing the purchase of gold through the purchase of Yuan. Floating the Yuan would drive the price of gold skyward, devaluing the US currency massively and creating hyper-inflation.
In short - a float of Chinese currency markets could seriously harm the long term economic futures of the United States. If China wants to scare us and scare us good - all they have to do is threaten a general float.
This is -=not=- the same thing as just floating their currency vs the US currency and leaving everything else alone. That would be good for us -- a general float would be catastrophic.
