It's just monetary policy. The Federal Reserve controls interest rates in this fashion, only in this case, the Chinese government is purchasing the bonds. When the U.S. government increases spending (and increases its debt), it issue more bonds to pay for their expenditures. If there is no one to purchase the bonds, this can have an adverse effect. However, China (and not just China, a huge fraction of our bonds are purchased by European nations) often purchases federal and municipal bonds in bulk. As a result, interest rates across the board are lowered so other bond issuers can compensate for the increase in demand. This in turn encourages investors to take on new loans or refinance their old ones, which then spurs innovation, growth, and economic prosperity.
In general, this is a good way to close a recessionary gap in potential output. However, this attitude was also a byproduct of the Bush administration's foreign policy (which occurred during an economic boom), and while it stimulated growth, it was artificial growth incapable of sustaining itself. Usually in this situation the Federal Reserve would tighten monetary policy in order to stem overaggressive expansion, but apparently it was the belief of the board of governors that this growth was simply due to an increase in worker productivity rather than a bubble. This was actually the case in the late 90s when Greenspan refused to tighten monetary policy, and turned out to be right when the 2001 recession was relatively mild. Unfortunately, they gambled that this was the case again, and they were wrong, which is why the recession we are in right now is so unusually severe.
However, trying to fix the mistakes of five years ago by decreasing spending would have disastrous results. It's an entirely different ball game now, and we have to encourage growth wherever we can, or we will likely see stagflation again. We are experiencing a minor supply shock from Middle East conflict right now, and if we choose to increase regulation, raise taxes, and cut spending, we are going to be caught in a very bad situation. The combination of poor fiscal policy and a supply shock could make the climb out of this recession a long and arduous one. Thankfully, we've got the right guy running the Fed right now, and I have faith in Geithner at Treasury. It's the grandstanding idiots on Capitol Hill and in the White House I'm worried about.