This article, initially published in the May issue of Financial Culture magazine, marks the 879th article released by the Xijing Research Institute and the 816th original piece by Dean Zhao Jian. To stay abreast of major reports and unlock a host of benefits, including exclusive member live streams, internal publications, and high-end networking circles, scan the QR code at the end of the article to join the Xijing Research Institute as a member. Gain valuable insights and stay ahead of the curve.

This year's government work report introduced the concept of 'investing in people' for the first time in the context of fiscal policy and the allocation of national resources, a move with profound practical implications and policy rationale. As China's economy has advanced to its current stage, it has transcended the era of 'investing in things.' The marginal returns on investments in fixed assets, such as real estate and infrastructure, are diminishing, and there is a certain degree of structural overcapacity in existing assets. In contrast, investments centered on people, such as those in childbirth, education, healthcare, wellness, elderly care, cultural tourism, and other sectors, remain relatively underdeveloped. There is significant room for improvement in social security and livelihood measures. Against this backdrop and policy orientation of 'investing in people,' the financial sector also needs to undergo a comprehensive and in-depth transformation, shifting from a model centered on physical asset collateralization and securitization to one that provides full life-cycle financial services centered on people, talent, and human capital. The government's proposal of five key financial initiatives has already laid out a clear direction in this regard.

Text

I. Practical Context: The Urgency Amidst Cyclical Demand Shortfalls and Structural Imbalances

The current phenomena of insufficient demand and overcapacity in the Chinese economy stem from both cyclical and structural factors. Cyclical issues can be resolved over time through inventory and capacity reduction. Structural problems, however, manifest as imbalances and mismatches in various relationships, including supply and demand, domestic and external demand, investment and consumption, as well as production and income. With the recent in-depth transition from a high-speed development model to a high-quality one, resolving these issues and accelerating cyclical clearance and structural optimization necessitate adjustments in the distribution orientation of macroeconomic policies and investment inclinations in the public goods sector.

The urgency of shifting macroeconomic policy focus to 'investing in people' lies in stimulating endogenous demand, encompassing both consumption and investment demand, both of which are currently experiencing historic downturns. These downturns stem from structural overcapacity caused by two major exogenous shocks. Firstly, the 2020 global pandemic saw China leverage its effective containment policies and stable industrial supply chains to provide goods and supplies to countries worldwide. While ensuring global supply stability, China also accumulated significant latent production capacity. As other countries' supply chains recovered, China's global reserve capacity faced structural overcapacity, necessitating continued overseas output through low prices and overseas expansion, which in turn exacerbated internal overcapacity issues. Secondly, the profound transformation of China's real estate sector since 2021 has led to a rapid decline in real estate investment, significantly reducing demand across more than 50 industries and causing substantial overall contraction. Factors diverted from real estate and its ancillary industries have shifted to other sectors, further intensifying internal competition and overcapacity. Additionally, adjustments in real estate prices have diminished the asset's role as a safeguard in household wealth, leading to negative wealth effects and dampening confidence and future market expectations. Ultimately, the macroeconomic manifestation of insufficient aggregate demand stems from micro-level decision-making behaviors, necessitating understanding and analysis from the perspective of individual micro-entities.

A more immediate urgency arises from the need to regenerate economic growth momentum. Economic indicators from 2024 reveal that one-third of direct growth momentum originates from external demand, with the contribution of external demand driven by the broad export chain to GDP growth potentially exceeding half. In China's new development paradigm of mutually reinforcing domestic and international circulations, the current primary driver stems from the promotion of domestic circulation by international circulation, contrary to the original intent of the dual circulation system. With Trump's aggressive tariff storms sweeping the globe, the current pattern of stabilizing the economy through international circulation driving domestic circulation faces challenges and risks this year. Trump has imposed successive tariffs on China, with new tariff increases exceeding 100%, leading to a severe situation where imports and exports have been suspended and disrupted. Thus, there is an urgent need to stimulate domestic demand, particularly by expanding consumption, ensuring that the driving force for economic circulation remains firmly in our hands. Consumption primarily relies on individual spending, which, in turn, depends on enhancing individuals' income capacity, lifestyle preferences, and social security. All these aspects are inseparable from 'investing in people.'

II. Policy Rationale: The Conclusion of the Local Government-Led Era of 'Investing in Things'

According to the principles of development economics, a developing economy in its initial stages, characterized by low capital stock and underdeveloped public infrastructure, needs to accumulate savings by 'tightening its belt' and 'investing in things' to rapidly complete primitive capital accumulation and preliminary national infrastructure construction. This process of 'investing in things' generally unfolds in two stages: the industrialization stage, where the economy evolves from a traditional agricultural model to an industrial one, forming an increasingly mature industrial manufacturing system and gradually increasing the share of the secondary industry in the national economy; and the urbanization stage, where, accompanying industrialization, a significant population migrates from rural to urban areas, continuously increasing the proportion of urban residents and making urban life the predominant lifestyle. Both stages are closely linked to 'investing in things,' with industrialization requiring substantial savings to invest in fixed assets like factories and machinery, and urbanization necessitating investments in urban infrastructure and real estate.

China's economy has witnessed nearly half a century of rapid development, with industrialization now fully realized. China boasts 41 major industrial categories, 207 medium categories, and 666 minor categories, making it the only country in the world with a complete range of industrial classifications as defined by the United Nations. In 2023, China's industrial added value accounted for 31.7% of GDP, with manufacturing adding value constituting 26.2% of GDP and approximately 30% of the global total. Among 500 major industrial products, over 40% rank first globally in production volume. Since 2009, China has consistently held the top position as the world's largest exporter of goods. The export product mix has continuously optimized, with the proportion of manufactured goods exports rising above 90% after 2000. In 2023, electromechanical products accounted for 58.5% of total exports, and with 5.22 million vehicles exported, China became the world's largest automotive exporter. Urbanization is largely complete, with the national urbanization rate of the permanent population reaching 66.16% by the end of 2023. The number of cities nationwide reached 694, with 29 cities having a permanent population exceeding 5 million and 11 cities exceeding 10 million. In 2019, the urban water supply coverage rate, gas coverage rate, sewage treatment rate, and built-up area green coverage rate significantly increased to 98.78%, 97.29%, 96.81%, and 41.51%, respectively. The completion of industrialization and urbanization owes much to the high-speed, large-scale development model led by local governments, centered on 'investing in things.'

However, excessive investment in 'things' has also brought numerous issues, such as overcapacity, low asset turnover rates, heavy debt burdens, and high economic volatility. Therefore, with industrialization and urbanization largely accomplished, China's development model needs to transition from a high-speed to a high-quality approach. 'Investing in things' has reached a point of diminishing returns, with surpluses in capital, production capacity, and debt. Conversely, while physical capital is in excess, intangible capital surrounding people, such as in childbirth, education, healthcare, wellness, culture, and elderly care, remains relatively insufficient. In this context, national policies should shift from 'things' to 'people,' addressing the shortcomings of inadequate and incomplete investment in human capital. This transition is an inevitable shift in policy orientation and tone for high-speed developing economies in their later stages.

III. Financial Function: The 'Five Key Initiatives' and Full Life-Cycle Financial Services for People

According to the basic laws of industrial economics, in an era of surplus physical capital from 'investing in things,' the tertiary service sector often becomes the focus of subsequent development. Finance, as a typical representative of modern service industries, not only signifies a human capital-intensive sector within 'investing in people' but also guides the resource allocation transition from 'investing in things' to 'investing in people' through investment and financing services. From the perspective of China's various financial policy orientations, significant strategic planning has already occurred in recent years. The 2023 Central Financial Work Conference proposed the 'Five Key Initiatives' of technology finance, green finance, inclusive finance, pension finance, and digital finance, which are essentially financial policy designs centered on 'investing in people.'

Technology finance aims to promote the deep integration of technology and finance, providing diversified financial support for technological innovation activities. Technological innovation primarily stems from intelligence and human resources, essentially resulting from human capital accumulation. Thus, technology finance provides financial services tailored to talent and intelligence. Green finance refers to financial services supporting environmental improvement, climate change mitigation, and efficient resource utilization, fundamentally aimed at enhancing the living environment for humans. Inclusive finance emphasizes the accessibility and fairness of financial services, aiming to provide equal and effective financial services to vulnerable groups such as micro and small enterprises, farmers, urban low-income populations, impoverished individuals, and people with disabilities and the elderly. The development of inclusive finance holds significant importance for promoting employment, encouraging entrepreneurship, narrowing the urban-rural gap, and achieving common prosperity, representing a direct form of 'investing in people,' especially for groups most in need of improved welfare. Developing pension finance and improving the pension finance system is crucial for young people to plan for their elderly lives in advance, ensuring the quality of life for the elderly and maintaining social stability. Pension finance encompasses various domains, including pension finance, pension service finance, and pension industry finance, aiming to provide comprehensive and multi-tiered financial services for the elderly, representing a direct form of 'investing in people.' Digital finance refers to financial activities conducted using digital technologies, including mobile payments, online lending, digital currencies, and robo-advisory services. Developing digital finance enhances the efficiency and quality of financial services, reduces costs, expands boundaries, and increases the inclusivity and accessibility of financial services, significantly improving the convenience and coverage of 'investing in people.'

Besides making contributions in response to the country's major macro-financial policies, the financial industry also needs to innovate its business and enhance its services from the micro-level of individuals, providing diversified and personalized financial services throughout a person's entire life cycle. In terms of childbirth, it can offer consumer credit and insurance services that complement national policies encouraging and safeguarding childbirth. In education, it can provide more comprehensive low-interest student loans and more robust investment and financing services for educational institutions. In areas closely tied to young people, such as career development and housing, it can offer enterprise annuities, occupational annuities, comprehensive housing mortgage loans, payroll wealth management, work injury medical insurance, investment advisory services, financial supermarkets, and other financial services. In healthcare, it can provide comprehensive investment, financing, and payment settlement services for hospitals, innovative drug research and development institutions, biopharmaceutical companies, and pharmaceutical supply chains. In elderly care, it can offer improved financial services for industries such as wellness, cultural tourism, health care, elderly care services, elderly care real estate, and elderly health. These people-centered financial services differ from collateral-based and securitized services focused on physical capital and tangible assets, requiring a human-centric transformation within financial institutions themselves.

【Disclaimer】This article solely represents Dean Zhao Jian's personal academic viewpoints and aims to facilitate communication and discussion. The content is for reference only and does not constitute any investment advice.