China’s rapid economic development has come with serious problems in income distribution. The rising income inequality has attracted a lot of attention, but few studies focus on income polarization. Serious income polarization not only solidifies income classes, but also brings adverse effects on social stability. This paper estimates the trends of income bi-polarization and multi-polarization using the data from China Household Income Project (CHIP), and decomposes them by income source with the Shapley method. The paper makes the following findings. First, income polarization declined from 1988 onwards, but increased again from 1995 to 2007, staying on a high level even though slightly lower than that of 1988. Second, the largest contributor to aggravating income bi-polarization and multi-polarization is wage while transfer income from collectively and state-owned enterprises mitigates income bi-polarization in rural areas, and property income mitigates both income bi-polarization and multi-polarization in urban area. Third, in rural areas, wage aggravates income bi-polarization and multi-polarization in 1988–2002; in urban areas, wage and operational income aggravate bi-polarization while operational income and government subsidy mitigate income multi-polarization in 1995–2007.