"Then there's the small issue that the Iphone is extremely expensive for the typical Chinese consumer"

$400~$600 cell phones are pretty common among many Chinese consumers. If iphone sells same price as in US, Apple will probably sell more in a single city in China than the whole US.

Unlike the west, Apple's got almost no market share in China. I was shocked to hear ipod hold 80% of mp3 global market, when I saw no one using the fancy gadget in China.
I think most Chinese consumers are better informed that there exists many mp3 players that have most storage, more features, smaller, easier to use, and at lower prices. (I don't understand why ipod need itunes to work when no others requires software.)
Also different in China is that people buy their phones and get their airtime separately. Without subsidy, iphones would cost even more. Also, anyone who can afford to use cellphone has one. The growth market is in the low end phone.
As a result, Apple is not a significant brand China, so Apple doesn't have much bargaining power with the Chinese operators.