Who's territory would it be? Would they be as big on handhelds as Nintendo are?  Or would they mainly buy consoles? If so, then who takes the market there, Sony, MS, or Nintendo?

Outside of Japan and the U.S is Sony territory. I can't see China being any different

Someone in china would come up with the PlaYYStationn, thatll look just like it and play its games, but like everything else be a cheap knockoff?

impossible to say.

It should be interesting to watch. The strong nationalism in China, or rather the strong anti-Japanese sentiment in China has manifested in them burning and destroying Japanese cars, shops, restaurants, products, etc. That doesn't mean either of the two (PS3 and Wii) won't be the market leader, but I think there's a prejudice against them which won't do them any favors.

do you think they dont use Sony cameras or TV's in China? 

They're definitely used as not everyone clings to those nationalistic beliefs, but from what I understand there are those who want nothing to do with anything related to Japan, and instead go for alternatives, such as South Korean brands like Samsung. The numbers for that group of people are not insiginficant. What's funny to me is they don't seem to mind getting paid for building Japanese product - like the PS3 - or going to Japan for higher wages in low skilled areas like agriculture.

That row both countries have concerning those disputed islands has only made things worse.

I see Sony or Nintendo dominating, maybe both will do well.

Sony or nintendo.. hopefully both

WWII scars still exist between Japan and China. I could honestly see Microsoft getting the win because of this.