China Unicom will probably launch a Wi-Fi-enabled iPhone in China, Sina Tech reported on Wednesday, citing  an unnamed source close to the country's internet watchdog.

China Unicom will probably launch a Wi-Fi-enabled iPhone in China as it strives to persuade Ministry of Industry and Information Technology (MIIT), China's internet watchdog, that  iPhone will support a special China-only standard known as WAPI (Wireless LAN Authentication and Privacy Infrastructure), the source said.

According to the source, Unicom may first launch iPhones without Wi-Fi, followed by WiFi-enabled versions.

AppleInsider previously guesstimated that the approval process for the iPhone would take four to six months, making a potential launch date no later than January 2010.

 Wi-Fi, a function China banned on mobile phones until this year, is now allowed only on handsets that support a domestic security specification for wireless LANs (local area networks).

Foreign firms are not allowed to see the full details of WAPI and thus must produce handsets in cooperation with local companies. It's suspected the WAPI system allows the government to exercise some control over which websites are available.

China Unicom said last Friday it had reached a three-year iPhone distribution deal with Apple, ending months of rumor about an impending agreement. The carrier will offer the iPhone 3G and iPhone 3GS, with the first handsets going on sale in the fourth quarter.

The deal launches Apple into a huge market where its products already have a following among fashion-conscious urbanites. China has nearly 700 million mobile subscribers, and 141 million of them used China Unicom's service at the end of July.

Marvin Lo, an analyst at Daiwa Securities, expects about 2 million iPhones sales in China each year through the China Unicom tie-up, not far above the number sold in other countries, he said. Apple currently sells about 30 million iPhones per year worldwide, he said.

China is a big market, but the iPhone faces competition in the country from copycat handsets and from iPhones imported on the gray market, Lo said.

Knock-off iPhones, sometimes hard to distinguish from real versions and other times engraved with brand labels like Aiphone or Iphne, are widely sold in electronics markets in China for around US$100. They often share a display case with more expensive unlocked iPhones that have been smuggled into China.

Smuggled iPhones and others bought by Chinese travelers abroad are already popular in the county. There are currently about 1 million iPhones in China, consultancy Ovum estimates.

The iPhone will also have to compete against Ophones, handsets from local carrier China Mobile with a similar interface. China Mobile on Monday showed off Ophones from companies including Dell, Lenovo Mobile and Dopod, which sells phones from High Tech Computer (HTC) in China. A sign by the Dell device said it was a prototype, but the Dopod phone, a version of the HTC Magic, is already on sale in China and other Ophones will go on sale soon.

China Mobile's newly launched mobile application store, for platforms including the Ophone, will help its handsets compete against the iPhone and its App Store, said Lo. IPhones will sell better than Ophones at first, but localized applications for Ophones could boost them in the future, he said.

But what if China Unicom turns Wi-Fi function on for iPhone?

An industry insider in China said  there might be chain reactions following Unicom's Wi-Fi-enabled iPhones.

China Telecom, which has long been advocating Wi-Fi for Chinese government, may launch massive amounts of Wi-Fi phones soon. This, will bring the reshuffle of the mobile communication industry. The operation management systems and business model of the three giants in China will change a lot upon this.