When Wi-Fi vendors learned of China's demand that devices sold to the world's most populous nation adhere to a little-known security standard, the reaction was akin to waking on Christmas morning to find a lump of coal in your stocking.

Although China is just a small piece of the $3 billion market of devices allowing enterprises and home consumers to create wireless networks, the Asian-Pacific region is the second-largest Wi-Fi market next to North America, according to the Synergy Research Group.

Wi-Fi vendors are protesting the decision by China's government requiring Wi-Fi gear sold or manufactured in China support the country's Wired Authentication and Privacy Infrastructure (WAPI), a security standard used nowhere else in the world.

The latest Wi-Fi devices now employ Wi-Fi Protected Access (WPA) and Advanced Encryption Standard (AES), both security standards adopted by the Institute of Electrical and Electronics Engineers (IEEE) that creates the 802.11 wireless standards, and the Wi-Fi Alliance that tests for 802.11 interoperability. The IEEE told Chinese officials in a letter that the new regulation will "prohibit the use of 802.11 products and thereby limit choice and increase costs to users."

Beijing is also requiring that wireless gear vendors partner with 11 designated Chinese technology companies which have access to the WAPI standard. Wi-Fi companies that already have signed contracts or inventory in the country have until June to partner up with a local wireless outfit. While the U.S. government is appealing the decision, Dennis Eaton, chairman of the Wi-Fi Alliance industry group, holds out little hope of compromise or appeal by China.

"Of the several Wi-Fi chip manufacturers I have spoken to after this was announced, none have said that they will immediately license, but most said that they are watching the situation," says Allen Nogee, analyst with research firm In-Stat/MDR .

Wi-Fi companies are confused and concerned by the new rules, according to Eaton.

The regulation targeting Wi-Fi gear is "a barrier for non-Chinese companies," says JupiterResearch senior analyst Julie Ask. She believes the move was made to provide some breathing room for local wireless developers while also allowing the Chinese government "to control the market."

The "easiest route into China probably is partnerships," says Ask. Soon after the guidelines were unveiled, Wi-Fi equipment maker Netgear announced an alliance with China's Legend Group. Legend is one of the 11 companies named by Beijing to control the WAPI encryption scheme.

The partnership allows Netgear to apply pressure and attempt to influence the impact of the new rule, according to Patrick Lo, chief executive of NetGear. Lo says accommodating the WAPI standard will pose little trouble for companies.

Nogee doesn't believe licensing and imbedding the WAPI standard in products is so easy.

"The margins in Wi-Fi equipment just aren't there," he says.

If the guidelines become too difficult for companies to comply and equipment prices increase, "consumers will turn to the black market -- probably not good either way for U.S. companies," says Ask.

Nogee says the new rule will damage traveling businesspeople, hotels and hotspots.

"Let's says that a hotel in China wants to attract U.S. guests by offering free Wi-Fi service. Since the Chinese Wi-Fi [security] standard is different than elsewhere, this won't be possible. There goes a big part of the market."