This paper's goal is to increase the understanding of the inequality trends during the transitional period in China. From 1978 to 1995, China has been undergoing 18 years far-reaching economic system reform and opening to the outside world nationwide. During the transitional periods, the average household income per capita increased substantially and so did income inequality. Using time-series data from SSB, this paper discusses the changing shape of the income distribution for the population as a whole during the 18 years of transitional period, with special reference to the impact of major reform measures with large distributional implications. Also, on the basis of the cross-section dataset in 1988 and 1995, this paper decomposes inequality indices, using two decomposition methods, to separate components of household disposable income and decompose income inequality by sub-group population. The main findings of the paper are, first, the national income inequality, the inequality within and between urban and rural areas, and the regional inequality were widening. Second, household income in urban areas more and more depends on the market rather than the traditional distribution plan. Third, the fastest growing contributor is individual wage from township or village enterprises; on the other hand, the contribution of self-consumption of household products decreased significantly. Fourth, the largest contribution to changes in aggregate inequality is made by changes in within-group inequality rather than between-group. In general, income distribution in urban and rural areas in China is shifted more and more from the course of systematic transition to the course of development.