This paper investigates the theoretical relationship between economic reforms and inequalities in socialist countries and tests it empirically in the case of China. The paper argues that the issue of whether market oriented reforms are likely to increase or decrease inequality in the former socialist economies is an empirical question which cannot be settled by a priori reasoning. On the one hand, economic inequality may rise with the reintroduction of property income and incentive payments and the reduction of barriers to opportunity for labor and capital to fully realize their highest earning potentials, On the other hand, inequality may decline with the decentralization of property rights, information and the reduction of barriers to the movement of goods and productive factors. The Chinese experience shows that economic inequalities did not increase but decline slightly during the first stage of the reforms. But they rose during the second stage of the reforms. Hence, the Chinese experience is largely congruent with the Szelenyi-Manchin hypothesis
