i stayed in a mix of hostels and cheap hotels during my 3 weeks in china. here is what i found.
hostels are great for meeting people. no question. in beijing i stayed at a hostel and met two travelers who ended up joining me for the great wall. in hotels you just dont get that.
but hostels can be noisy. people come in late or pack their bags at 6am. snoring is a problem. bring earplugs.
budget hotels in china are actually pretty decent. i stayed at a few hanting hotels which is a local chain. clean room, private bathroom, and only like 30 dollars a night. the bed was fine. the staff spoke zero english but that was okay.
the main difference is social. if you want to meet people stay in a hostel. if you want privacy and good sleep stay in a budget hotel.
in chengdu i tried a capsule hostel. basically a pod like in japan. it was cool but a bit claustrophobic. would try again though.
one thing about hotels. many budget places in china do not accept foreign credit cards. i had to use alipay or pay cash. so have a backup plan.
also always check if the hotel accepts foreigners. some small ones dont have the license. booking.com usually says in the listing.
my personal favorite was a hostel in xi'an. cant remember the name but it was in an old building with a courtyard. felt very local.