Possible Chinese financial crisis

An excellent article that explains in plain terms how the system has been working is Why China’s RMB exodus IS the story.

My interpretation is China could experience the same capital flight that triggered the 1997 Asian financial crisis.

"The problem the PBoC now has, however, is that its stock of yuan bills is growing quicker than its stock of US Treasuries. This has consequences for its ability to control the yuan-dollar peg.  If the situation worsens, and the dollar shortage gets more extreme, there will come a point where Chinese dollar liabilities will be stretched to the limit, and potentially defaulted upon."

That means the dollars the PBOC owes to domestic entities that traded the dollars they got from exports to the US into yuan they could use in China.

"What happens if foreigners decide the last thing they want is yuan exposure (due to China economic bubble fears), and would much prefer to keep hold of their US dollars? What happens if instead of a dollar inflow you get a mass capital outflow from China, with as many Chinese as possible converting yuan-denominated assets into dollars?"

If China chose to sell some of its Treasury holdings to meet the demand for dollars, that would be a problem for the US.

UPDATE: 

Cash Exiting China

"Domestic money in China will be the first to head for the exit - insiders will always know more than outsiders about the underlying economic conditions.  So the exodus of cash could indicate that the Chinese story is coming to a close - and that will have significant consequences for the global economy."