For some more context, it seems that the US would have difficulty targeting China specifically with this specific measure, cancelling just those bonds held by China. Even some of the proponents of such a measure admit that:
Cancelling Chinese-held U.S. debt could trigger severe disruption in the market for U.S. Treasuries, which could further undermine other financial markets.
In less hawkish/conservative circles, there's discussion whether such debt-cancelling threats are even constitutional, given the 14th Amendment of the US Constitution. Also note that Kudlow has denied that US administration is considering that move in particular:
Trump's top economic adviser denied the report. "The full faith and credit of U.S. debt obligations is sacrosanct. Period. Full stop," White House economic adviser Larry Kudlow told Reuters.
There are quite a few other measures the US could use to target China though and Trump said it's much easier for his administration to pursue those instead:
Asked whether he would consider having the United States stop payment of its debt obligations as a way to punish Beijing, Trump said: "Well, I can do it differently. I can do the same thing, but even for more money, just by putting on tariffs. So, I don't have to do that."
Also, if you want some kind of (smaller scale) example of what can happen if those potentially in the sights of such a measure (in the bond market) "smell it", Russia has unloaded practically all their US treasury bonds in 2018 (whether they had a justifiable intelligence reason to do this or not, who knows...)
The sudden debt dump may have contributed to a short-term spike in Treasury rates that spooked the market. 10-year Treasury yields topped 3% in April for the first time since 2014. [...]
Russia's selling has not hurt America's ability to borrow money. That's because investors -- particularly life insurers and pension funds that serve aging baby boomers -- have a big appetite for fixed income. Treasury rates quickly descended back below 3% because demand for bonds continued to grow.
The limited impact from Russia's selling makes sense. It's not a leading creditor of the United States. China is. Even at Russia's recent peak of $105.7 billion in November 2017, it only ranked as the 15th biggest foreign holder of US debt. China owns about $1.2 trillion -- or roughly 10 times as much as Russia.
But the bond market is just one side of this coin. Simultaneously, if China decided (for whatever reason) to dump US treasuries at massive scale, that would weaken the dollar, which would be a boost, temporarily at least, for US exports.
N.B. one less-than-completely-unrealistic way that the US could do this selective debt-cancelling, albeit not so overtly, is to allow lawsuits that seek to recover (from the PRC) the debt once issued by the Republic of China. These have been dismissed in the late 1970s by retroactive application of the Foreign Sovereign Immunities Act. It so happens that these debts (with interests and penalties) would amount about about $1T too. (That would probably require Congress cooperation, but here's some precedent with Congress amending FSIA for the purpose of allowing lawsuits against Saudi Arabia following 9/11.)
“I think everyone who works for Trump at the Treasury Department thinks this is loony,” says Mitu Gulati, law professor at Duke University and a sovereign-debt restructuring expert. “But I can’t help but be tickled pink, because at a legal level these are perfectly valid debts. However, you’ve got to get a really clever lawyer to activate them.” [...]
Gulati argues that this could perhaps be done—for instance, by arguing that China making payments on modern bonds violates pari pass[u] (equal payment) clauses embedded in the historic debt. Such clauses were successfully used by hedge funds seeking payment from Argentina a few years ago. It’s a legal long shot, but one that Gulati has assigned to his law students as a theoretical exercise. The U.S. Securities and Exchange Commission is studying the debt, too.
On the FSIA-amendment angle, there actually such proposals out already but these seem to have been made explicitly with reference to Covid-19 lawsuits (rather than recovering old RoC debt):
Another Missouri official, Republican Senator Josh Hawley, appears to have recognized that suits against China for damages caused by coronavirus cannot be brought in U.S. courts. He has proposed changing U.S. law to allow these claims (a move that would have disastrous foreign relations consequences). Another proposal by Republican Senators Marsha Blackburn and Martha McSally (the ‘‘Stop China-Originated Viral Infectious Diseases Act of 2020’’ or the ‘‘Stop COVID Act of 2020”), would create an exception to sovereign immunity where a foreign State is alleged “whether intentionally or unintentionally, to have discharged a biological weapon.” The text of a third proposed amendment to the FSIA introduced by Rep. Dan Crenshaw (R-Texas) and Senator Tom Cotton (R-Ark.) targets foreign States, but it unironically condemns those
responsible for, or complicit in ordering, controlling, or otherwise directing acts intended to deliberately conceal or distort the existence or nature of COVID-19, if such acts are found to have likely contributed to the global COVID-19 pandemic.