The 2025 Central Economic Work Conference emphasized the need to combine “investment in physical assets with investment in human capital.” Under the direction of the new development philosophy, investment in human capital has become a critical variable in clearing bottlenecks in economic circulation and a key lever for accelerating the transformation of growth drivers.

‘Physical assets’ over ‘human capital’

The World Bank classifies countries annually into four income groups based on per capita gross national income: high-income, upper-middle-income, lower-middle-income, and low-income. China moved from the low-income to the lower-middle-income category in 1999, and then to upper-middle-income status in 2010. For comparative purposes, countries other than China that fall into the upper-middle-, lower-middle-, and low-income groups are collectively referred to here as “non-high-income countries.”

According to government finance data released by the International Monetary Fund, from 2005 to 2022, China’s share of spending on physical assets exceeded that of high-income countries by 18 percentage points and that of non-high-income countries by 15 percentage points. By contrast, China’s share of investment in human capital was 22 percentage points lower than that of high-income countries and 8 percentage points lower than that of non-high-income countries. This suggests substantial room for optimizing China’s fiscal spending structure and increasing investment in human capital.

More spending on human capital

Since the start of reform and opening up, China’s fiscal expenditure on physical assets has effectively driven the rapid accumulation of material capital. Over time, however, an extensive growth model overly reliant on material capital investment has exposed deeper problems, including diminishing marginal returns, inefficient factor allocation, and growing resource and environmental constraints.

At the same time, insufficient fiscal expenditure on human capital has struggled to meet the population’s rising expectations for a better quality of life in the new era and risks exacerbating imbalances in economic and social development. The key to combining investment in physical assets and investment in people lies in optimizing fiscal resource allocation and substantially increasing the share of spending devoted to human capital.

Greater fiscal investment in people can stimulate consumption vitality and generate new growth momentum. It can also foster innovation and accelerate the transformation of growth models. Moreover, expanding investment in human capital contributes to narrowing opportunity gaps and steadily advancing common prosperity for all.

Policy recommendations

Drawing on international experience while remaining grounded in domestic conditions, China’s fiscal spending structure could be optimized in the coming period by gradually adjusting the internal composition of expenditure. While keeping the overall shares of spending on physical assets and human capital stable, the proportion devoted to physical assets could be gradually reduced from the current 30% to 15%, while the share allocated to human capital could rise from 41% to 56%.

Based on these objectives, policy priorities for increasing investment in people include expanding compulsory education by incorporating public preschool and general high school into the free education system, gradually extending free education from nine to 15 years, from kindergarten through high school. Greater investment in rural education is needed to promote more balanced and higher-quality basic education across urban and rural areas. At the same time, spending on primary-level healthcare should be increased to support the downward extension of high-quality medical resources and strengthen the initial diagnosis capacity of primary-level medical institutions. Further reforms to the healthcare security system should establish a universal critical illness assistance mechanism and raise reimbursement rates. National coordination of basic pension insurance should be advanced, along with increases in the minimum basic pension for urban and rural residents. Public cultural services should also be accelerated toward digital and intelligent development to better meet the needs of remote areas and special groups.

Wu Yanbing is a research fellow from the Institute of Economics at the Chinese Academy of Social Sciences.