This paper shows that the trend of worsening income distribution in China has been reversed. We ascertain the robustness of this decline using five nationwide household survey and different inequality indicators. Attempts are then made to uncover the underlying reasons. Major findings include: (1) The decline is largely due to improvement in the distribution of transfer income although its share in the total income is small and diminishing; (2) Occupational income, particularly its component of wage income, plays an important role; and (3) Other drivers include the expansion of the middle-income group, rapid urbanization, and the shrinking disparity within Eastern China.