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In this article we analyze trends in income inequality and the distribution of income in rural China from 1987 to 1999. We find an uneven but long‐run increase in inequality in rural China and show that nearly half of the rural population was not much better off in 1999 than at the start of the period. We rule out geography as the most important factor for explaining income differences and the increases that occurred over time. Much more important were growing differences between households living in the same village, province, or region. We also find that access to nonagricultural incomes from local wage employment and family businesses contributes to inequality but that employment outside the county in which a household lives and accessed through temporary migration is relatively equalizing. Finally, we document important strengths and weaknesses of the primary data set used for our analyses relative to other …