China will do what it considers to be in its own interest. That should surely be self-evident. What is not self-evident is how it does – and should – identify that self-interest. That is almost always more difficult than naive realists tend to suppose. This is true of its policy towards North Korea. It is just as true of its policy towards the exchange rate.

The Chinese government seems to believe its interest lies in maintaining a highly competitive real exchange rate for as long as possible. The evidence also suggests it can do so for a long time. But should it do so?

Economic theory indicates that a fast-growing developing country should have an appreciating real exchange rate. This is known as the Balassa-Samuelson effect, after the late Bela Balassa of Johns Hopkins University and the Nobel laureate Paul Samuelson, who discovered it independently of each other.

The argument is straightforward. Economies contain two sorts of activity: tradeable – manufacturing and services that can be supplied readily at a distance; and non- tradeable – haircuts, childcare and so forth. With economic development, productivity in the former tends to rise faster than in the latter.

The remainder of Martin Wolf’s column can be read here (FT.com subscribers only). Discussion from our guest economists is free – click ‘Comments’ below.

China represents something new in the history of the modern world: a developing country that has a vast global impact. This is why Hank Paulson, the US treasury secretary, has followed Robert Zoellick, former deputy secretary of state, in calling for it to be a “responsible stakeholder”. But China will behave as the US wants only if it perceives that this is in its own interests. Again, the US should not be surprised. This is how Americans view their own country’s international obligations.

At present, the most vexed issue between the two countries is the payments “imbalances”. Many in the US complain that China is manipulating its currency, to preserve excessive competitiveness. Certainly, China has a large current account surplus, forecast by the International Monetary Fund at $184bn this year, or 7.2 per cent of gross domestic product. No other country has as big a surplus.

The starting point then must be whether it makes sense for a poor country to export so much capital. The answer, I would argue, is “no”. But we must then also ask why China is running such large surpluses. The short answer is that it is saving even more than it is investing at home. This is true by definition. In China’s case, this surplus is largely being invested in its vast foreign currency reserves, now some $1,000bn (or 40 per cent of gross domestic product).

The remainder of Martin Wolf’s column can be read here (FT.com subscribers only). Discussion from our guest economists is free – click ‘Comments’ below.