Along with the market development and urbanization after the implementation of the reform and open door policy,China has been adjusting the administrative divisions at the sub-provincial level so as to accommodate the scale expansion of market economy and the agglomeration of factor flowing .In the process of transition from a planned economy to a market economy in China,there is a close link between the administrative divisions,economic development and urbanization .China's administrative divisions,which were shaped by the planned economy,set the boundaries for the development of regional and urban economies,which is a typical mode of China's″economy of administrative divisions .″ With the cross-boundary mobility of urban and regional elements brought about by the market economy,administrative divisions have to undergo necessary adjustments to support the agglomeration of the market economy and the development of economic scale .Such adjustments to adapt to the breakthrough of boundaries of the market economy and to expand economic space are certainly the result of the games of competitions and compromises between/among the given local governments in their pursuit of benefit maximization .The provincial and central governments have also played their role in bringing about the necessary adjustments .There have been stories of success and failure in the reform of administrative divisions .In each adjustment of Hangzhou-Xiaoshan administrative divisions,we found that the regional economy and urbanization were updated,and the economic space for the development of Hangzhou as a metropolis was expanded .The basic reasons can be seen in the fact that such adjustments did not result from the orders of higher-level administrations,but from the games of competitions and compromises between the two local governments .The adjustments of the administrative divisions of Hangzhou and Xiaoshan are not only a case in point of the functional transformation of the local government,but also the important content of the reform of the governmental system . In fact,at first Hangzhou and Xiaoshan did not voluntarily or consciously implement the adjustment of administrative divisions and economic integration .However,the two local governments gradually adapted to the market in their games,giving up the confrontational competitions in favor of win-win cooperation .As a result,the adjustment was timely,appropriately and maturely completed on the premise of respecting the development law of market economy .Moreover,it was not a simple adjustment of the administrative divisions,but an integration of government reform and the transformation of governmental functions .Against the background of the reform of the provincial governmental system,the local governments of Hangzhou and Xiaoshan have a strong sense of serving the market economy . The regional market economies compete in a relatively fair environment and have strong impetus for endogenous growth,contributing to a steady and healthy process of urbanization . The significant revelation from the paper is that the reform of administrative divisions cannot cure the stubborn disease of″economy of administrative divisions″of China .The cures are system reform,a clear distinction between the government and the market,and the change of an″omnipotent government″ with direct control of economy into a public service-oriented government .Only in this way can the local governments have more space for the development of urban economy and urbanization .The case study of the development of regional economy and urbanization of Hangzhou and Xiaoshan administrative divisions has significant theoretical and practical significance for future study .