How does escaping HTML for XML work?
There are five special characters in XML which you have to escape if you do not want their special function. These are:
' single quote
" double quote
< less-than
> greater-than
& ampersand
You can escape them either by wrapping them inside <![CDATA[...]]> or by replacing them with their respective XML entities.

Do I always have to escape my HTML inside XML?
If you want to preserve the HTML, for example if you want to show the HTML code on screen, yes.
If you want to use HTML in order to style your text for use in TextViews, it depends, as there are two ways to do this:

Approach A: Leave HTML unescaped and call getText(...)
You can embed your HTML code in XML without escaping it, but then you must call getText(...) instead of getString(...) from Java. The advantage is that this approach is very easy, you do not need any escaping and you can just as well reference the HTML strings from XML layout files without losing the text styling.

Approach B: Escape HTML and call Html.fromHtml(getText(...))
If you escape your HTML by using CDATA sections or by escaping the single characters, you have to call Html.fromHtml(getText(...)) from Java if you want to get the styled text.

Which HTML tags can I use?
You can only be sure about <b>, <i> and <u>. These will (almost) always work. Others may work on some devices, but usually they do not.

What does that mean for me?
Localize takes care of all the text processing and escaping for you. When exporting your translations to XML files, you can choose between approaches A (getText(...)) and B (Html.fromHtml(getString(...))) for your project.

Resource valueJava methodDisplayed result
<b>Lorem</b> ipsum <button>dolor</button> sitgetString(...)Lorem ipsum dolor sit
<b>Lorem</b> ipsum <button>dolor</button> sitgetText(...)Lorem ipsum dolor sit
<b>Lorem</b> ipsum <button>dolor</button> sitHtml.fromHtml(getString(...))Lorem ipsum dolor sit
&lt;b&gt;Lorem&lt;/b&gt; ipsum &lt;button&gt;dolor&lt;/button&gt; sitgetString(...)<b>Lorem</b> ipsum <button>dolor</button> sit
&lt;b&gt;Lorem&lt;/b&gt; ipsum &lt;button&gt;dolor&lt;/button&gt; sitgetText(...)<b>Lorem</b> ipsum <button>dolor</button> sit
&lt;b&gt;Lorem&lt;/b&gt; ipsum &lt;button&gt;dolor&lt;/button&gt; sitHtml.fromHtml(getString(...))Lorem ipsum dolor sit
<![CDATA[<b>Lorem</b> ipsum <button>dolor</button> sit]]>getString(...)<b>Lorem</b> ipsum <button>dolor</button> sit
<![CDATA[<b>Lorem</b> ipsum <button>dolor</button> sit]]>getText(...)<b>Lorem</b> ipsum <button>dolor</button> sit
<![CDATA[<b>Lorem</b> ipsum <button>dolor</button> sit]]>Html.fromHtml(getString(...))Lorem ipsum dolor sit

Use the following string-array as the resource for your human-readable preference options. You can use ListPreference's android:entries, for example.

<string-array name="language_selection_human" translatable="false">
    <item>—</item>
    <item>Afrikaans (Afrikaans)</item>
    <item>Albanian (Shqip)</item>
    <item>Amharic (አማርኛ)</item>
    <item>Arabic (العربية)</item>
    <item>Aragonese (Aragonés)</item>
    <item>Armenian (Հայերեն)</item>
    <item>Azerbaijani (Azərbaycan)</item>
    <item>Bashkir (Башҡортса)</item>
    <item>Basque (Euskara)</item>
    <item>Belarusian (беларуская мова)</item>
    <item>Bengali (বাংলা)</item>
    <item>Bosnian (Bosanski)</item>
    <item>Breton (Brezhoneg)</item>
    <item>Bulgarian (български)</item>
    <item>Catalan (Català)</item>
    <item>Chinese (Simplified) (中文)</item>
    <item>Chinese (Traditional) (中文)</item>
    <item>Chuvash (Чӑвашла)</item>
    <item>Croatian (Hrvatski)</item>
    <item>Czech (Česky)</item>
    <item>Danish (Dansk)</item>
    <item>Dutch (Nederlands)</item>
    <item>English (English)</item>
    <item>Estonian (Eesti)</item>
    <item>Finnish (Suomi)</item>
    <item>French (Français)</item>
    <item>Galician (Galego)</item>
    <item>Georgian (ქართული)</item>
    <item>German (Deutsch)</item>
    <item>Greek (ελληνικά)</item>
    <item>Gujarati (ગુજરાતી)</item>
    <item>Haitian (Kreyòl Ayisyen)</item>
    <item>Hausa (Hausa)</item>
    <item>Hebrew (עברית)</item>
    <item>Hindi (हिन्दी)</item>
    <item>Hungarian (Magyar)</item>
    <item>Icelandic (Íslenska)</item>
    <item>Igbo (Asụsụ Igbo)</item>
    <item>Indonesian (Bahasa Indonesia)</item>
    <item>Irish (Gaeilge)</item>
    <item>Italian (Italiano)</item>
    <item>Japanese (日本語)</item>
    <item>Javanese (Basa Jawa)</item>
    <item>Kannada (ಕನ್ನಡ)</item>
    <item>Kazakh (Қазақ тілі)</item>
    <item>Khmer (ភាសាខ្មែរ)</item>
    <item>Kirghiz (Кыргызча)</item>
    <item>Korean (한국어)</item>
    <item>Kurdish (Kurdî)</item>
    <item>Lao (ພາສາລາວ)</item>
    <item>Latvian (Latviešu)</item>
    <item>Lithuanian (Lietuvių)</item>
    <item>Luxembourgish (Lëtzebuergesch)</item>
    <item>Macedonian (Македонски)</item>
    <item>Malagasy (Malagasy)</item>
    <item>Malay (Bahasa Melayu)</item>
    <item>Malayalam (മലയാളം)</item>
    <item>Maltese (Malti)</item>
    <item>Maori (Māori)</item>
    <item>Marathi (मराठी)</item>
    <item>Nepali (नेपाली)</item>
    <item>Norwegian Bokmål (Norsk bokmål)</item>
    <item>Norwegian Nynorsk (Norsk nynorsk)</item>
    <item>Occitan (Occitan)</item>
    <item>Persian (فارسی)</item>
    <item>Polish (Polski)</item>
    <item>Portuguese (Brazil) (Português)</item>
    <item>Portuguese (Portugal) (Português)</item>
    <item>Punjabi (ਪੰਜਾਬੀ)</item>
    <item>Romanian (Română)</item>
    <item>Russian (Русский)</item>
    <item>Serbian (Српски)</item>
    <item>Slovak (Slovenčina)</item>
    <item>Slovene (Slovenščina)</item>
    <item>Somali (Af-Soomaali)</item>
    <item>Spanish (Español)</item>
    <item>Sundanese (Basa Sunda)</item>
    <item>Swahili (Kiswahili)</item>
    <item>Swedish (Svenska)</item>
    <item>Tagalog (Tagalog)</item>
    <item>Tajik (Тоҷикӣ)</item>
    <item>Tamil (தமிழ்)</item>
    <item>Tatar (Татарча)</item>
    <item>Telugu (తెలుగు)</item>
    <item>Thai (ไทย)</item>
    <item>Turkish (Türkçe)</item>
    <item>Ukrainian (Українська)</item>
    <item>Urdu (Urdū)</item>
    <item>Uzbek (Oʻzbekcha)</item>
    <item>Vietnamese (Tiếng Việt)</item>
    <item>Walloon (Walon)</item>
    <item>Welsh (Cymraeg)</item>
    <item>Western Frisian (Frysk)</item>
    <item>Yiddish (ייִדיש)</item>
    <item>Yoruba (Yorùbá)</item>
    <item>Zulu (isiZulu)</item>
</string-array>

Use the following string-array as the resource for your machine-readable preference options. You can use ListPreference's android:entryValues, for example.

<string-array name="language_selection_machine" translatable="false">
    <item></item>
    <item>af</item>
    <item>sq</item>
    <item>am</item>
    <item>ar</item>
    <item>an</item>
    <item>hy</item>
    <item>az</item>
    <item>ba</item>
    <item>eu</item>
    <item>be</item>
    <item>bn</item>
    <item>bs</item>
    <item>br</item>
    <item>bg</item>
    <item>ca</item>
    <item>zh-rCN</item>
    <item>zh-rTW</item>
    <item>cv</item>
    <item>hr</item>
    <item>cs</item>
    <item>da</item>
    <item>nl</item>
    <item>en</item>
    <item>et</item>
    <item>fi</item>
    <item>fr</item>
    <item>gl</item>
    <item>ka</item>
    <item>de</item>
    <item>el</item>
    <item>gu</item>
    <item>ht</item>
    <item>ha</item>
    <item>iw</item>
    <item>hi</item>
    <item>hu</item>
    <item>is</item>
    <item>ig</item>
    <item>in</item>
    <item>ga</item>
    <item>it</item>
    <item>ja</item>
    <item>jv</item>
    <item>kn</item>
    <item>kk</item>
    <item>km</item>
    <item>ky</item>
    <item>ko</item>
    <item>ku</item>
    <item>lo</item>
    <item>lv</item>
    <item>lt</item>
    <item>lb</item>
    <item>mk</item>
    <item>mg</item>
    <item>ms</item>
    <item>ml</item>
    <item>mt</item>
    <item>mi</item>
    <item>mr</item>
    <item>ne</item>
    <item>nb</item>
    <item>nn</item>
    <item>oc</item>
    <item>fa</item>
    <item>pl</item>
    <item>pt-rBR</item>
    <item>pt-rPT</item>
    <item>pa</item>
    <item>ro</item>
    <item>ru</item>
    <item>sr</item>
    <item>sk</item>
    <item>sl</item>
    <item>so</item>
    <item>es</item>
    <item>su</item>
    <item>sw</item>
    <item>sv</item>
    <item>tl</item>
    <item>tg</item>
    <item>ta</item>
    <item>tt</item>
    <item>te</item>
    <item>th</item>
    <item>tr</item>
    <item>uk</item>
    <item>ur</item>
    <item>uz</item>
    <item>vi</item>
    <item>wa</item>
    <item>cy</item>
    <item>fy</item>
    <item>ji</item>
    <item>yo</item>
    <item>zu</item>
</string-array>