Market research firm In-Stat reported Friday that China Mobile, the nation's largest wireless carrier, said there were 400,000 unlocked Apple iPhones using its cellular network service at the end of 2007, representing approximately 10 percent of the touchscreen handsets sold at the time.

With the iPhone not yet officially available in China, savvy entrepreneurs have been purchasing hundreds of thousands of iPhones in the U.S. and Europe, then "cracking" the operating system to allow the device to be used on any GSM network says In-Sat.

"The figure surprised us as it is fourfold of that we estimated before," the firm said. "We have never doubted that the iPhone will achieve greater success than the iPod in China if Apple teams with China Mobile to launch its Chinese version."

The iPhone popularity stems from the local market. Unlike the U.S. where the smartphone market is fairly limited and business users focused, China is an entertainment-oriented individual consumer market. Chinese mobile users purchase smartphones for entertainment and to access mobile Internet applications.

"The iPhone will be favored by these consumers as it can better meet such demand," said In-Sat. Secondly, said the firm, Chinese users are willing to pay significantly more for their mobile phones than their U.S. counterparts. A fact that leads In-Sat to estimate that there are 28 million potential users for the iPhone in China.

The surge is credited to a fundamental difference between American and Chinese buyers. Where most U.S. buyers confine smartphone purchases to the workplace, Chinese customers often use their phones for entertainment or Internet access, such as playing music or e-books. Apple's focus on this last usage pattern for the iPhone, especially with its user interface, makes it a logical fit for the market.

Chinese are also more likely to spend larger amounts of money on their phones, In-Stat says, despite lower average incomes. A full fifth of all phones sold in the southeast Asian country cost at least 4,000 Yuan Renminbi each, or US$533.

Separate reports in recent days have pointed to China as the heart of a thriving gray market economy in unlocked iPhones. With as many as one million of these devices on the market around the world, the country is potentially a hotbed of supply chain leaks that sees iPhones reach unofficial hands before ever reaching territories officially slated to receive the shipments.

Analysts have wrestled with tracking the missing devices themselves and, in one case, estimated that the number of iPhones in use outside of Apple's official bounds could total 1.5 million, or more than a third of the entire supply as of last month.

In the short term, however, Apple is unlikely to convert this semi-underground trade into legitimate business. China Mobile, the dominant carrier in the country, claimed to have ended talks regarding an official iPhone in January. Company chief Steve Jobs later contradicted these claims and said that the provider had only made one visit to Apple headquarters to discuss the possibility of a Chinese iPhone.