A new, independently designed household income survey for China in 2002 shows some decline in income inequality in both rural and urban China since 1995. However, the overall Gini ratio for China remained unchanged due to a rise in the urban–rural income gap. The reduction in rural inequality stemmed mainly from a fall in both inter-provincial inequality and inequality within most of the provinces, as well as from a further improvement in the distribution of wage income and farm income and a reduction in the regressiveness of net taxes. The reduction in urban inequality came from a fall in inter-provincial inequality and better distribution of imputed rental income and net taxes. The results raise questions about whether recent more equity-oriented policies, such as the “great western development strategy,” began to reduce some dimensions of overall income inequality. For the first time, a special survey was implemented to furnish data on migrants living in towns and cities. Incorporating the migrants into the urban population raises urban inequality and reduces the urban–rural gap somewhat, but leaves the latter still very high by international standards.