What to Expect at the Upcoming Central Economic Work Conference

Signal Shows China's Economic Agenda Shifts from Handouts to Human Investment

This December, China will convene its annual Central Politburo Economic Work Conference. This meeting serves to review the economic performance of 2025 and to set the tone and direction for economic policy in 2026, with the order of its priorities directly reflecting the hierarchy of economic tasks. Last year’s conference continued the assessment made at the September 26th Politburo meeting, placing “stimulating consumption” at the top of the agenda for the first time, followed by the 300 billion yuan consumption subsidies.
Looking ahead to this year’s conference, I personally believe the policy orientation will maintain “stimulating consumption” as the highest priority while placing greater emphasis on shifting from short-term subsidy stimuli toward building long-term institutional safeguards. Notably, following this year’s Fourth Plenum, expert interpretations of key documents have increasingly highlighted the concept of “investing in people” and

The Party’s leading journal, Qiushi, featured a special interview in its latest issue with Yu Chunhai于春海, Executive Dean and Professor of the School of Economics at Renmin University of China, to elaborate on this concept. Yu posits:

“Investing in people” refers to channeling more fiscal funds and public resources into areas vital to people’s livelihoods—such as education, employment, healthcare, and social security—and into enhancing human capabilities, maintaining health, fostering career development, and unlocking potential. This aims to drive high-quality economic development by unleashing consumption potential and elevating human capital. Proposed as a counterpart to “investing in physical assets,” this concept embodies an investment philosophy that “values people alongside, and not just, material outcomes.” Fundamentally, “investing in people” represents not merely a shift in investment focus but a new development orientation, a corrective to past investment models, capacity expansion patterns, and indeed, the overall development paradigm.

In the same issue of Qiushi, Cai Fang蔡昉, a senior economist and advisor to China’s leadership, also published an article, Optimizing the Income Distribution Structure through Institutional Development以制度建设优化收入分配结构, emphasizing that while China has historically focused more on urban-rural inequality, inequality in income distribution within urban areas has seen no long-term improvement. He argued that urban residents face more immediate pressure from AI disruption compared to rural residents, necessitating greater government efforts at the practical policy level. Cai, a long-time researcher of China’s labor market who describes himself as “an economist studying the economics of the poor,” offered several recommendations:

To effectively leverage the safeguarding role of redistribution, it is necessary to rationally adjust and gradually narrow income disparities between urban and rural areas, regions, industries, and population groups. This requires optimizing the tax structure, improving the local and direct tax systems, refining tax policies on business, capital, and property income, and effectively implementing special additional deductions in the personal income tax system. The objectives and means of redistribution policies are reflected both in systems that regulate income distribution and in improving the provision of basic public services. These include: population support policies centered on childbirth, parenting, and education; a human capital development system focused on education and training; public employment services and labor market institutions aimed at enhancing employment quality; aging response policies centered on elderly care, support, and the development of the silver economy; a social security system encompassing healthcare, social insurance, and social welfare, as well as affordable housing policies—all of which strengthen the “income distribution regulator” function of social security. Additionally, it is essential to improve the social assistance system, caring for and supporting disadvantaged and vulnerable groups. The fiscal transfer payment system should be enhanced, its structure optimized, and regional disparities in per capita fiscal expenditure narrowed.

In essence, his policy advice advocates enhancing the country’s fiscal capability through tax reform, while strengthening the social security system to provide targeted support to vulnerable groups.

Echoing this sentiment, Gao Peiyong高培勇, a member of the Chinese Academy of Social Sciences, also stressed that reform of the income distribution system should be the lever to standardize mechanisms for income and wealth accumulation. His proposed directions include transitioning the tax system from being predominantly indirect to direct, expanding the comprehensive collection scope of individual income tax, and gradually achieving “non-discriminatory assistance” by expanding pension coverage and increasing subsidies for low-income groups. Offering a pointed critique of China’s current redistribution mechanisms, he stated:

China’s redistribution mechanism remains a pronounced weak spot, reflected primarily in the three pillars of taxation, social security, and transfer payments. The redistributive function of the tax system is constrained. Less than 10% of total tax revenue comes directly from individuals, with virtually no property taxes on residents. Over 90% of taxes are paid by enterprises, and the tax burden is highly transferable, resulting in a minimal difference between pre-tax and post-tax Gini coefficients and a weakened capacity to narrow the wealth gap. Social security and transfer payments suffer from uneven coverage. The urban-rural binary and identity-based disparities coexist: permanent employees in state-owned units enjoy comprehensive protection, while coverage for rural residents, non-public sector employees, and non-permanent staff remains inadequate. The lack of equal access to basic public services directly undermines the redistributive function, making the task of boosting consumption complex due to varying demands and capacities across different social groups.

He summarized the importance of the reforms as: “The urgency is unprecedented, the difficulty should not be underestimated, and despite the challenges, progress must be made.”紧迫性前所未有、艰巨性不容低估、虽有困难但必须推进。

Some can argue that the articles above are merely theoretical. But at the practical level, Finance Minister Lan Fo’an, in an article published today in the People’s Daily, outlined the fiscal policy’s position in supporting the upcoming 15th Five-Year Plan. The article has the subtitle "学习贯彻党的四中全会精神" (Study and implement the spirit of the 4th Plenum), which means it’s part of a series that includes specific ministries’ breakdown and operationalization of the objectives proposed by the Fourth Plenum. Also worth noticing is that Zheng Shanjie, head of NDRC, also published one in this series, named 坚持扩大内需这个战略基点 Uphold the strategic underpinning of expanding domestic demand.

He explicitly positioned “comprehensively expanding domestic demand” as the top priority.

Manoj Kewalramani

published the English translation on Tracking People's Daily. The article emphasized the need to:

Increase the intensity of adjustment through taxation, social security, transfer payments, and other means; increase residents’ income through multiple channels; optimize the income distribution structure; and vigorously boost consumption.

The article’s core aligns closely with the discourse in Qiushi. Lan Fo’an directly proposed to “adopt a people’s livelihood-oriented fiscal policy, directing more funds and resources toward investing in people,” and demanded to “closely integrate investing in physical assets with investing in people.” I believe that, in a sense, “investing in people” has evolved into a concrete operational principle for fiscal resource allocation.

In general, I believe this series of signals indicates a consensus among the decision-makers: the fundamental cause of insufficient household consumption lies in an inadequate social safety net and the limited effectiveness of income redistribution. Therefore, I would anticipate that the upcoming Central Economic Work Conference, while likely maintaining last year’s top ranking for “consumption,” will move beyond short-term models like last year’s special bond issuance for short-term “subsidy-driven consumption stimulation.” Instead, it will place a stronger emphasis on optimizing income distribution and strengthening the social security system. Of course, the meeting’s communiqué typically focuses on clarifying macro policy directions and priorities. The specific implementation rules and effectiveness of policies will ultimately need to be verified and realized through the detailed plans of various departments in the coming year.

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Below is the full translation of Cai Fang’s article on Qiushi I made with the help of AI

Optimizing the Income Distribution Structure Through Institutional Development

Cai Fang

Income distribution holds a pivotal position in ensuring and improving people’s livelihoods. It connects employment expansion and wage growth in the primary distribution domain, social security and the provision of basic public services in the redistribution domain, and public welfare and charitable endeavors in the third distribution domain. The income distribution system constitutes a foundational institution for promoting common prosperity. The report to the 20th National Congress of the Communist Party of China proposed upholding the principle of distribution according to work as the mainstay while allowing for multiple forms of distribution, and building a coordinated and supportive institutional system encompassing primary distribution, redistribution, and third distribution. The Fourth Plenary Session of the 20th Central Committee further outlined tasks for improving the income distribution system, proposing the implementation of a plan to increase the income of urban and rural residents, effectively raising the income of low-income groups, steadily expanding the size of the middle-income group, rationally adjusting excessively high incomes, outlawing illegal income, and promoting the formation of an olive-shaped distribution pattern. This important deployment charts the course for refining the income distribution system and holds significant meaning for implementing the concept of shared development, solidly advancing common prosperity, and ensuring the fruits of modernization benefit all people more extensively and equitably.

I. Current State of Income Distribution and Targets for Breakthrough

China’s income distribution landscape has undergone a shift from widening to narrowing income disparity, corresponding to turning points in economic development stages. Overall, in the first decade of the 21st century, income inequality showed a trend of expansion. For instance, indicators like the urban-rural income ratio reflecting income disparity between urban and rural residents, and the Gini coefficient depicting overall resident income disparity, peaked before 2010; meanwhile, indicators reflecting the tilt in factor distribution of national income, such as the share of labor compensation in primary distribution and the share of household income in national income, hit their lowest points. This period closely coincided with the phase of rapid economic growth, during which the rise in workers’ wages, the growth of household income, and the improvement in living standards for all residents primarily benefited from the “growing the pie” effect. Concurrently, the observed trend of widening income disparity could be seen as a time-lag phenomenon between “letting some get rich first” and others catching up later.

As China’s economic development entered a “new normal,” the “dividing the pie well” effect in the primary distribution domain became more prominent, reflecting high-quality and shared development, and significant achievements were also made in the redistribution domain. Particularly since the beginning of the second decade of the 21st century, urban employment has become fuller, with wages for ordinary workers rising notably faster; through vigorous poverty alleviation efforts, the reduction of rural poverty was remarkable, achieving the target on schedule in 2020 of lifting all 98.99 million rural poor out of poverty under the current Chinese standard; the scale of rural labor transfer continued to expand, and the policy environment for urban residence and work markedly improved. Simultaneously, China built the world’s largest social security and education systems, providing all residents with more and higher-quality basic public services.

Whether viewed from various indicator readings or the lived experiences of the people, China’s income distribution situation has generally shown a gradual improvement since the end of the first decade of the 21st century. Looking at indicators reflecting income disparity: the ratio of urban disposable income per capita to rural disposable income per capita dropped from its peak of 3.14 in 2007 to 2.34 in 2024; the Gini coefficient of disposable income per capita declined from its peak of 0.491 in 2008 to 0.465 in 2024. From the perspective of flow of funds accounts: the share of labor compensation in total primary distribution income increased from its low of 49.1% in 2007 to 53.6% in 2023; the share of household income in total disposable income rose from its low of 55.5% in 2008 to 61.2% in 2023.

At the same time, it must be recognized that Chinese modernization is modernization for common prosperity for all. The current state of income distribution remains unsatisfactory, which also reflects imbalanced and inadequate development and shortcomings in livelihood safeguards, requiring continued substantial effort. In accordance with the spirit and deployment of the Fourth Plenary Session of the 20th Central Committee, improving relevant income distribution indicators should become the direct goal for significantly narrowing income disparity, and policy focus and effort should be directed accordingly. For example, it is generally believed that an urban-rural income ratio below 2.00 and a Gini coefficient below 0.4 are necessary for a society to have a relatively equal income distribution pattern. By such standards, China’s urban-rural income ratio (2.34) and Gini coefficient (0.465) in 2024 are relatively high and should be further reduced from their respective bases. As for the share of labor compensation in primary distribution income and the share of household income in disposable income, due to differences in statistical caliber, there are no universally recognized target benchmarks. However, overall, the improvement in these two indicators in China in recent years has not been sufficiently pronounced; they have not yet returned to the levels seen in the early 1990s. Moreover, in international comparison, such as with the average of OECD countries, they remain relatively low, thus necessitating clear further enhancement.

II. Analysis of Causes of the Current Income Disparity

Specific income distribution patterns are both the result of policy orientation and institutional arrangements, and a socio-economic development phenomenon, often possessing fairly distinct characteristics of the development stage. For instance, during China’s period of rapid economic growth, corporate behaviors and economic activities aimed at improving total factor productivity were often accompanied by financial deepening and an increasing capital-labor ratio. In other words, technological progress and industrial upgrading inherently imply capital substituting for labor, with capital-intensive equipment, machinery, or robots impacting workers’ jobs. In fact, this is also a common feature in the modernization process; many countries have experienced declines in the share of labor compensation and household income to varying degrees and at different times. For example, according to IMF estimates, the decline in labor’s share of national income in OECD countries between 1990 and 2007 was primarily related to increases in total factor productivity and the capital-labor ratio.

For China, income inequality should be understood within the context of economic development. First, industrialization and industrial structure upgrading are typically accompanied by a process of capital deepening—i.e., growth in physical capital represented by machinery, equipment, and infrastructure outpaces growth in labor input. Factor remuneration tends to tilt towards capital, manifesting as a declining trend in the share of labor compensation and the household sector. Second, as the growth model shifts from factor-input driven to productivity driven, human capital receives higher returns, leading to a divergence in employment quality and wage income among workers, demarcated by education level and skill proficiency. Finally, innovation activities aimed at enhancing productivity and competitiveness constitute a process of “creative destruction.” Competing entities reap rewards for successful innovation or suffer losses from failed innovation based on their market performance. If workers employed by failing businesses lack sufficient safety nets, their employment, income, and living standards can be negatively impacted.

The urban-rural income gap is also a developmental phenomenon. Whether in an agricultural economy or a rural economy dominated by agriculture, the process of industrialization and urbanization inevitably involves the outward transfer of production factors—a process of resource reallocation, most prominently manifested in the transfer of surplus labor, thereby increasing both agricultural labor productivity and overall national economic labor productivity. The expansion of agricultural operational scale, the increase in agricultural mechanization, and the full transfer of surplus labor may be hindered by various factors or suffer from lack of coordination, causing agricultural labor productivity to lag behind non-agricultural sectors, resulting in low farming returns and ultimately manifesting as a widening urban-rural income gap. For instance, in 2024, agricultural labor comprising 22.2% of the total workforce produced only 6.8% of GDP as agricultural value-added, illustrating the fact of low agricultural labor productivity. This helps explain why farming income cannot increase in sync with non-farming income. In the same year, the share of operating income from farming and other household businesses in rural households’ disposable income was only 33.9%, significantly lower than the 42.4% share of wage income.

The Gini coefficient is a comprehensive indicator, primarily composed of three parts: rural income disparity, urban income disparity, and the income gap between urban and rural areas, statistically reflecting the overall societal income distribution relatively completely. For a long time, the urban-rural income ratio has been a major contributing factor to overall income disparity. Before income disparity peaked at the end of the first decade of the 21st century, changes in the urban-rural income ratio were highly consistent with the Gini coefficient. However, over the more than ten years since income distribution began improving and both indicators started declining, the urban-rural income gap has decreased more significantly and continues to show a narrowing trend. Meanwhile, the Gini coefficient’s decline has been relatively smaller; after reaching a low of 0.462 in 2015, it has hovered relatively, indicating that the narrowing urban-rural income gap no longer drives improvement in overall income distribution to the same extent.

If the narrowing of both rural income disparity and the urban-rural income gap is more pronounced than the narrowing of overall income disparity, we can statistically infer that urban income disparity has relatively expanded and become a more significant contributor to overall income disparity. Some research corroborates this divergence trend in China’s overall income distribution between urban and rural areas, providing quantitative evidence for the expansion of urban income disparity. It can be said that the improvement in urban income distribution in recent years has not been as evident as in rural areas and between urban and rural areas. This is closely related to structural employment contradictions faced by the urban labor market, particularly the impact of AI on jobs and insufficient protection of workers’ rights in platform employment. If structural employment contradictions are not effectively addressed and greater policy efforts are not made in income distribution, the widespread penetration of AI will inevitably exacerbate this situation.

The income disparity existing in China is a product of the development stage, with its own origins and logic. As the development stage changes, the context and status of the income distribution pattern will also change. The formation of a specific income distribution pattern is inseparable from the fulcrum of institutional development and the orientation of policy implementation. For example, the recovery of labor compensation and household income shares over the past decade or more is precisely due to labor shortages becoming the norm, which changed factor endowments and relative prices as well as policy inclinations. Poverty alleviation, rural revitalization, substantial policy support tilted towards agriculture, rural areas, and farmers (”san nong”), and the improvement of the rural social security system have all been important drivers for narrowing rural income disparity and the urban-rural income gap. More proactive employment policies have also made significant contributions to the income growth of ordinary urban and rural workers and their families.

III. Key Focal Points for Improving the Income Distribution System

Ensuring and improving people’s livelihoods within development is a fundamental task, requiring the construction of an institutional system for sharing the fruits of modernization, significantly narrowing income gaps among residents, and continuously raising the level of common prosperity for all people. During the 15th Five-Year Plan period, implementing the plan to increase urban and rural residents’ income should focus on simultaneous and coordinated efforts in primary distribution, redistribution, and third distribution, effectively increasing the income of low-income groups, steadily expanding the size of the middle-income group, rationally adjusting excessively high incomes, and promoting the formation of an olive-shaped distribution pattern with the middle-income group as the mainstay. Looking at the three main distribution domains separately below reveals key policy focal points for improving the income distribution system.

First, focus on resolving structural employment contradictions, coordinately advance labor market development and the improvement of employment-related systems, optimize human resource allocation, improve mechanisms for determining wages, their reasonable growth, and payment guarantees for workers, and increase the share of labor compensation in primary distribution. Addressing the widespread existence of flexible employment and new employment forms, accelerate the improvement of labor legislation and enforcement, advance labor market institutional development including minimum wage adjustments, labor contracts, and collective wage bargaining, emphasize eliminating age discrimination in employment, and ensure that under conditions of deep AI penetration, new employment forms are not equated with informal employment. Promote the reform of the household registration system and related institutional reforms. Under the premise of promoting equalization of basic public services between urban and rural areas, further promote rational and orderly labor mobility, prevent the flow and allocation of factors from diverging from the direction of labor productivity improvement, tap the potential supply of non-agricultural labor, expand the space for resource reallocation, and unlock the consumption demand of new urban residents. Focusing on the “old and young” in the labor market (older and younger workers), strengthen targeted public employment services, integrate skills training throughout the entire life cycle of labor employment, and continuously improve labor market matching levels and allocation efficiency. Improve the primary distribution mechanism where various factors’ contributions are evaluated by the market and remuneration is determined accordingly, promoting that those who work more earn more, those with higher skills earn more, and innovators earn more.

Second, through institutional forms like taxation, social security, and transfer payments, increase the implementation intensity of redistribution policies, providing residents with more, better, more equal, and more inclusive basic public services. Both domestic and international experience and lessons indicate that merely improving primary distribution mechanisms is insufficient to significantly narrow income disparity and can hardly reduce the Gini coefficient below 0.4. Based on the correct orientation of income distribution policy, starting from implementing redistribution to improve social policies and promote institutional development is a crucial part of “dividing the pie well.” For example, the average Gini coefficient for OECD countries before redistribution is 0.473, dropping to 0.324 after redistribution—a 31.4% reduction in inequality. To effectively play the safeguarding role of redistribution, rationally adjust and gradually narrow income gaps between urban and rural areas, regions, industries, and groups, it is necessary to optimize the tax structure, improve local and direct tax systems, refine tax policies for business income, capital income, and property income, and implement personal income tax special additional deduction policies well. The goals and means of redistribution policies are reflected both in systems regulating income distribution and in improving the basic public service supply system. This includes: population support policies centered on childbirth, child-rearing, and education; a human capital cultivation system centered on education and training; public employment services and labor market institutions centered on improving employment quality; policies addressing aging centered on elderly care, support for the elderly, and developing the silver economy; a social security system centered on healthcare, social insurance, and social welfare, along with affordable housing policies, enhancing the “income distribution regulator” function of social security. Furthermore, it is necessary to improve the social assistance system, caring for and supporting disadvantaged and vulnerable groups. Improve the fiscal transfer payment system, optimize its structure, and narrow regional gaps in per capita fiscal expenditure.

Finally, create an institutional environment that incentivizes and regulates the development of public welfare and charitable endeavors, encouraging those who have prospered first to help others and promote common prosperity, advocating that all types of entities strengthen their social responsibility, and promoting the formation of a social ethos oriented towards goodness in development. To effectively play the supplementary role of third distribution, it is necessary to encourage high-income individuals and enterprises to contribute more to society. By improving the institutional framework for philanthropy, exploring effective forms of charity, nurturing and regulating the development of charitable organizations, strengthening supervision and management of charitable activities, we can properly guide and safeguard every act of goodwill. Although charitable donations, volunteer activities, and corporate public service initiatives may not significantly improve income distribution in terms of scale or proportion, the significance of third distribution lies more in the social ethos formed by the convergence of various good deeds, providing a more solid spiritual support and value guidance for common prosperity. For example, in the face of AI’s “double-edged sword” effect—significantly boosting productivity while potentially causing technological unemployment—a social ethos oriented towards goodness helps guide various actors such as investors, R&D institutions, and tech companies to transcend narrow, short-term profit orientations, promoting technology for good, innovation for good, and AI for good, ensuring technological progress benefits humanity and is deeply “aligned” with the goal of common prosperity for all.