In most developing countries, income inequality tends to worsen during initial stages of growth, especially in urban areas. The People’s Republic of China (PRC) provides a sharp contrast where income inequality among urban households is lower than that among rural households. In terms of inclusive growth, the existence of income mobility over a longer period of time may mitigate the impacts of widening income inequality measured using crosssectional data. We explore several ways of measuring income mobility and found considerable income mobility in the PRC, with income mobility lower among rural households than among urban households. When incomes are averaged over 3 years and when adjustments are made for the size and composition of households, income inequality decreases. Social welfare functions are posited that allow for a trade-off between increases in income and increases in income inequality. These suggest strong increases in well-being for urban households in the PRC. In comparison, the corresponding changes in rural households are much smaller.