Since liberalization, Indian forex kitty has been growing consitently and has become one of the growth parameters of the economy. But, having good forex reserves is only one aspect of a growing economy. Proper utilization of the same leads to better results. The Chinese experience may teach us some lessons.

The massive growth in foreign exchange reserves during the past few years and the depreciation of dollar against euro and yen forced the Chinese government to rethink its foreign exchange policy. The issue was more in debate in January 2006 when Beijing's State Administration of Foreign Exchange (SAFE) issued a statement that signaled a desire to convert China's foreign exchange holdings from the US Government bonds into yen and euro.

However, Zhou Xiaochuan, the governor of the People's Bank of China, the Central bank of the country, has publicly denied rumors that China would diversify its reserves away from US Treasury bonds, but various s opine that to have an efficient foreign exchange management China diversified its reserves due to exemplifying simple principle "not putting all your eggs in one basket." Although the whole issue pertains to the Chinese economy, it teaches a lot of lessons to India too.

China has made a conscious effort to attract Foreign Direct Investment (FDI) ever since the reforms process was initiated in 1970. In 1980, China setup a special economic zone especially for export and import of goods and allowed FDI in the Special Economic Zone. Initially, foreign companies were reluctant to invest in the SEZ fearing policy reversal, but finally it proved to be successful in attracting FDI.

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