In 2000, the Chinese government initiated a campaign to develop Western China and reduce local and regional inequality. Privatisation has been a central component of the campaign. This article studies the relationship between privatisation and income inequality in Western China, based on survey data from 11 Western provinces collected between 2004 and 2005. This study first explores the link between privatisation and income inequality at the prefecture level, investigating whether a higher degree of privatisation can be linked to increased income inequality. Using multilevel random coefficient modelling, it then studies whether the impact of an individual’s socioeconomic position on their income varies across regions with different degrees of privatisation. The final part presents simulations of economic inequality based on the random slope model. The study shows that income inequality is higher in regions with higher degrees of privatisation, and larger privatisation correlates with lower individual income. Furthermore, the study confirms that individual income is strongly affected by education, occupation, employment sector and household registration status. Income differences based on these factors do not vary with the level of privatisation; however, a finding that contradicts market transition theory in the context of Western China.