Abstract: The changes unseen in a century, coupled with the surging tide of anti-globalization, have made the “high export, high investment, high growth” pattern of economic development in East Asia unsustainable and posed a serious challenge to the long-term growth of China’s economy, which has long been faced with under consumption. In view of this, China must promote common prosperity and narrow the income gap as soon as possible in order to boost domestic demand and promote a dual circulation. Focusing on the issue of income inequality, this paper reports for the first time on the China’s income ladder, analyses the changing trends in income distribution, and discusses the sources and key factors of China’s income inequality from a number of perspectives. We finds that the main causes of income inequality in China are the urban-rural segmentation, the low labor share, the large education gap and inadequate social security. In response to these problems, this paper proposes the following policy recommendations: replace hukou (“户口”) with residence permits and speed up the process of urbanization and citizenization, implement 12-year compulsory education and continue to expand university enrolment, increase social security expenditure and gradually eliminate moderate poverty, and improve the tax and financial system to increase the labor share. Steady implementation of these initiatives over the next 30 years is expected to reduce China’s income Gini index by 30-40%, while boosting economic growth and enabling China to achieve common prosperity after the middle of the century.