This story was on all the gadget sites yesterday:
http://www.digitimes.com/bits_chips/a20080702PD209.html
It's always hard to take these sorts of "sources indicate" stories seriously, but considering Apple's appetite for flash memory, I suppose it's pretty believable.
I've always wondered about the exact relationship of consumer demand vs. supply vs. cost as to why Chinese manufacturers just don't seem to be willing to offer devices much beyond 4GB, especially in their home market.