Category Browsing is Fiio's terminology for relying on a tag-based database. File/Folder a Browsing is file navigation just like on your computer. I've had much better luck with File/Folder Browsing on my X3 but know Fiio's made database improvements in the X5's firmware. If it works well, I'll use that instead of File/Folder Browsing in the future. The downside to Category Browsing is that if you switch cards a lot, it takes a bit of time every time you switch to rebuild the database.
Do the Fiio players not rebuild the database for a new card if you use File/Folder Browsing? That would be great for me, as I prefer file/folder browsing anyway.
Waiting for my Sansa players to refresh when I put in a new 32GB card drives me nuts.