The study on informality has experienced a shift from describing the spatial characteristics toward exploring the connotation of urban governance in recent years. This paper takes urban villages in Shenzhen, a typical informal settlement in China, as cases to analyze the two urban village governance modes of redevelopment and in situ upgrading and reveals the dynamics of the governance mode transformation. Through the lens of informality, this study focuses on the interaction among the government, the market, and former property owners on tenure legalization. The study finds that first of all, informality is the core of the transformation of urban village governance in Shenzhen. By strategically making use of informality, the government adopted different modes of urban village governance to fulfill the demands of urban development at different phases. Second, in the process of formalizing informal settlements through redevelopment, although the institutional framework is relatively complete, the boundary between informality and formality still changes continuously in property titling. While in the new governance mode of in situ upgrading in recent years, the government creates “special areas” in informal settlements via approving their de facto tenure security, so as to attract market force to upgrade physical environment and social management. Through revealing the mechanism in the blurred area between informality and for- mality, this paper responds to the dualistic argument on the informality theory, deepens the idea of taking informality as a flexible urban governance strategy in developing countries, and provides new thoughts for governance of informal settlements in China and other developing countries.