Recent empirical literature on nutrition intakes and income in China has warned that income growth either plays a small role or even a negative role in influencing diet quality in China, especially for low income households. Such arguments cast doubts on the conventional reliance on income as a policy tool to improve dietary consumption and tackle diet-related health issues. They, however, have been drawn mostly from analysis of changes in level of nutrient intakes and income effects on diet adequacy. No research has been done on how income affects diet diversity in China, despite its uncontroversial role for a healthy diet. This chapter tests the hypothesis that income growth improves diet diversity, and, hence, can offset detrimental effects of the nutrition transition on health in China during the period from 2004 to 2009. Using the most up-to-date nutritional data from the China Health and Nutrition Survey, the chapter constructs a measure of diet diversity from the number of food groups consumed. For the first time, the issue of endogeneity in estimating income effect on diet diversity is addressed by using instruments for household income. No matter which model specifications and estimation methods are adopted, the estimation results show that higher income improves diet variety. Low income people, particularly the poorest quintile, will be most benefited when their household income rises. Simple OLS regression shows that education has a significant and positive effect on diet diversity, with larger effect at higher education level. However, when endogeneity in income is addressed by the 2SLS estimation, education effects mostly disappear in terms of both statistical significance and magnitude. The stark difference between OLS and 2SLS estimates suggests that it is important to detect and address endogeneity in income. The OLS approach, as shown in this study, could undermine the role of income while overestimates education effects. Relying on OLS estimates, therefore, might mislead resource allocation in designing food and health policies.