China, like other middle income countries,  is facing the challenges of the next stage of development as its leaders seek to guide the nation into becoming a high income country. In this article we explore one of the major challenges that China is facing in the transition from middle to high income: the management of inequality. In particular, we explore the possible roots of future inequality that is associated with a nation's underinvestment in the human capital of broad segments of its population. To meet this goal, we describe two challenges that China faces in the light of rising wage rates and highly unequal income distribution today. We first discuss the structural and institutional barriers that are discouraging many students (and their parents) from staying in school to achieve the levels of learning that we believe are necessary for preparing individuals for employment in the coming decades. We also identify severe nutritional and health problems. We believe that these nutrition and health problems, unless addressed, will continue to create human capital deficiencies in poor areas of rural China and locking in decades of hard‐to‐address inequality.