While China's economic reform has brought about significant economic growth, there is a considerable debate about the impact of such market-oriented reform on income and welfare distributions. This paper examines the changes in income and welfare distributions in urban China from 1981 to 1998 and discusses implications for China's food consumption patterns and trade behavior. While the Lorenz curves estimated using Kakwani's interpolation method indicate that the level of income inequality in urban China has increased significantly since 1981, welfare comparisons based on generalized Lorenz curves suggest that the rise in real average income has more than compensated for the increase in inequality and has therefore brought about continuous improvement in welfare since 1981, except in 1988 and 1989 due to high inflation rates. Nevertheless, it becomes very critical for China to develop welfare programs and a social security system to provide a guaranteed living standard for low-income households. China's increasing income will continue to shift its food consumption from grains to animal products and, at the same time, the increasing income inequality will make food demand significantly different across regions and income groups.