I don't think they would buy it just because the memory cards cost so much. Many Chinese people are also poor. Only, the Eastern cities are particularly wealthy.

If Sony is allowed to sell this officially in China couldn't any video game console be sold there by simply by selling the console and the controller separately?

Why do people think Chinese people are poor.. their middle class has grown to half a billion people.. they are buying more flatscreen tvs then North America and are the second largest market for digital cameras.. the middle class are willing to pay for a premium class product..

if this was aimed at poor people.. wouldn't you think the internet connection and expensive Vita retail games would be a problem? or would they all jack up their Vita TV at their local cybercafe?

Think of parents who have to buy a games console for their young childern. A 100$ box is a much easier purchase than a 300-400$ box. It's not neccesarily for poor people. According to Pachter, there are 100 million middle class homes in China today. VitaTV could work wonders there.