Urban villages, namely villages encircled by urban environments, are unique phenomena that proliferated during China’s rapid urbanization process, as well as important development issues for many Chinese cities at present. This article focuses on two planning approaches for urban villages, dominated by the government’s uniform and formal planning and villagers’ spontaneous and informal planning practices, aiming to examine which planning approach is more conducive to urban village development. The two planning approaches for urban villages have simultaneously appeared in Hangzhou, a Chinese metropolis with a combination of high-speed economic growth, a unique geological environment, and a long cultural history, providing appropriate comparative study cases for this research. Two urban villages, Luojiazhuang and Yangjiapailou, located in plain and hilly areas in Hangzhou, respectively, and developed through the two planning approaches were selected as study cases. Primary data were collected based on field investigations, semi-structured interviews, and questionnaire surveys. The villagers’ rental income, shopkeepers’ business benefits, and tenants’ residential satisfaction were investigated to compare the development of the two urban villages. Results indicate that compared with the formal planning-dominated approach, the informal planning-dominated approach achieves continuously rising rental income, more stable business benefits, and higher residential satisfaction, better suited to urban village development. This study contributes to coordinated urban–rural interaction in the urbanization process and enriches the formality–informality debates from a spatial planning perspective.

Planning policies have greatly influenced the development of urban villages, an informal phenomenon in which rural settlements are encircled by urban environments during China’s rapid urbanization process. “The National New-type Urbanization Plan (2014–2020)” of China initiated in 2014 provides a new perspective on planning policy research on China’ urban villages. Hangzhou, a pioneer city that adopts new-type urbanization in China and combines the characteristics of rapid urban growth, mountainous urban terrains, and a long cultural history, serves as a typical case study to compare the planning policies responding to the informality of urban villages guided by traditional and new-type urbanization. This study employed the content analysis method to analyze the evolution of Hangzhou’s planning policies of urban villages since the reform and opening up and used one-way ANOVA to analyze the differences in rental levels among the urban villages developed under the planning policies of different urbanization stages, aiming to compare the influences of planning policies guided by traditional and new-type urbanization on urban village development. The results indicate that the policies allowing some degree of informality in the new-type urbanization stage achieve a higher rental level for urban villages than the policies of the traditional urbanization stages that restrict and prevent informality. The findings of this research suggest that informality may provide advantages that formality cannot replace and provides important policy implications for rapidly urbanizing countries.