The cost of a counterfeit iPhone isn't clear, but estimates put them at 500 yuan (approximately US$74 as of this writing). Legit iPhones sell for 5,000 yuan. The report notes that Apple is sending staff to Shenzhen to learn more about the case.
Last month, Apple gained control of the "i-phone" trademark in China after a long dispute with manufacturer Hanwang Technology who held the trademark for a device they briefly sold in 2003. Official iPhone sales in China have been disappointing, with China Unicom (the country's 2nd largest provider) announcing 100,000 units sold between the October, 2009 launch and December, 2009. China Unicom represents some 144 million users.
[Via iPhone Savior]
*Note: The Shenzhen Daily site is down as of this writing. The link included above is the Google Cache version whereas the source link below links to the original site.