This paper provides new estimates of the evolution of pay inequality in China, overall and also by region and sector, in the period from 1987 to 2012, using the between-group component of Theil’s T-statistic measured across regions and sectors. We find that China’s overall pay inequality started to rise rapidly in the early 1990s and that it peaked in 2008, with the between-province component peaking as early as 2002. Since 2008, overall pay inequality has decreased, with between-province and between-sector inequality both showing steady declines. We argue that China’s pay inequality during the reform period was not simply a matter of economic inequality; it was the joint product of both market and institutional forces. In this vein, we also argue that the recent decline of overall pay inequality after the 2008 global economic crisis was not a temporary phenomenon triggered by the global downturn, but a long-term outcome driven by both economic and policy factors.