Abstract: Based on the capital allocation efficiency model of Jeffrey Wurgler, this paper analyzes the quantitative relationship between physical capital growth and profit growth in papermaking and paper products industry in China. The conclusion is that the allocation efficiency of physical capital of papermaking and paper products industry is inefficient. The main factors are analyzed from the viewpoint of capital management and financing channel which restrict allocation efficiency of physical capital of papermaking and paper products industry. Finally, countermeasures are put forward to optimize allocation efficiency of physical capital of papermaking and paper products industry from the aspects of business model, capital utilization and regional layout.