What will Nintendo do about this huge problem?

[shams]

Release a special version of the Wii in China - with significantly different disc format, or something like that.

Then at least piracy will be contained within China.

There is another solution to piracy - peripherals. While its more than possible someone will "rip-off" the WiiFit board - its a lot harder to do, than just rip-off software.

Same applies to WiiWare/online apps.