Abstract: Based on the distinguishment between the connotations of urbanization and citizenization, the article analyzed the relationship among urbanization, citizenization and urban-rural income inequality. Both the time series data and the panel data of Shandong Provience were used to set up models for the analysis. The results of the Granger causality test show that urbanization and urban-rural income inequality interacts as both Granger cause and effect, and the relationship between citizenization and urban-rural income inequality is similar. The regression analysis results based on the time series data show that urbanization and citizenization can reduce the gap between urban and rural incomes, but industrialization and the government finance investment can contribute to the increase the gap. More importantly, the last two contributing factors of the urban and rural income inequality are stronger than the first both factors. However, the analysis based on the panel data shows that there is a positive relationship between urbanization and urban-rural income inequality in the short term. In other words, urbanization can increase the gap between urban and rural incomes in short period. Nevertheless, citizenization can contribute to reduce the gap between urban and rural incomes. The analysis results give a new interpretation of urbanization and urban-rural income inequality. Therefore, an adventurous hypothesis is set forth that urbanization prompts citizenization, which will lead to reducing urban-rural income inequality in the long run. Two interpretations are provided that the hypothesis is logical. First, it’s possible that the urbanization may widen the gap between urban and rural income in statistical perspective, because the strict conditions of the household system make the rural wealthy much easier to become urbanized and counted as urban population than the rural poor. Second, the current urbanization mode in China contributes to widen the urban-rural income inequality, that is, the peasants move to cities seeking for jobs, bust they do not have all the rights that a usual city citizen have due to the household registering system and related institutions. As a result, the peasants in the rural could not achieve economies of scale on the limited arable land. In spite of the peasants moved to the cities could obtain higher income in cities than in the rural, more surplus value that they produced are occupied and shared by the urban people and the foreign investors. Because there is negative relationship between citizenization and urban-rural income inequality, to promote the citizenization of the rural people who live and work in cities will be an appropriate way for reducing the gap between urban-rural incomes and urban and rural overall planning development. At the same time, changing the irrational urbanization development mode needs to be taken into consideration.