A blog on the Wretch.cc network (kinda like a Chinese blogspot) has screens from the Chinese version of iPhone's 2.0 firmware, detailing the new handwriting recognition. If it's real, which it seems to be, the new firmware will let people draw in characters with their fingers, then pick the closest approximation among choices that pop up.
For the Chinese version, you've got the choice of either handwriting or using Pinyin, which is like spelling out the word you want and choosing the correct character. Would Apple add all this Chinese and Japanese support if the iPhone wasn't coming to China and Japan officially? No, probably not. [Wretch via Macrumors]