The software giant has been discussing the launch with local Internet service providers and personal computer makers since late last year, and plans to appoint several sales agents for Xbox 360 in the mainland, sources in the consumer technology sector said.
Microsoft is also checking with the Chinese government, including the culture and information ministries, that authorities are comfortable with the product, the sources said.
The government reviews the content of video games sold in China and has been cautious about approving the sale of imported games, so its stance may be the main factor determining when Xbox 360 sales begin.
Microsoft has declined to give a specific timeframe for when Xbox 360 will begin selling in China, but some stores in major cities such as Shanghai have told potential consumers that it may be available for sale around the lunar new year in the middle of February, retail industry sources said.
Microsoft said in 2005 it intended to launch the Xbox 360 in China. But it has not announced a timeframe partly because of uncertainty over Chinese regulators' attitude to the product, according to Chinese media.
"We take a long-term approach to each market and continue to evaluate the China market for opportunities," Andres Vejarano, Regional Marketing Director at Microsoft's Entertainment & Devices Division for Asia & Greater China, said in an e-mailed response to a Reuters enquiry about the launch.
A standard Xbox 360 set sells for about $300 in Hong Kong, where the system was first launched in November 2005. More than 10.4 million Xbox consoles had been sold worldwide by the end of 2006.
The Xbox 360, Sony's new PlayStation 3 and Nintendo's Wii are fighting it out in the $30 billion global video game market. In China, however, the Xbox's main competition for now is likely to be the popular PS2, which Sony launched in China three years ago.
China is a fast-growing gaming market, where more than 120 million people out of a population of 1.3 billion are Web users. However, online gaming in China is far more popular than traditional consoles due to the big price difference.
"Microsoft definitely hopes to launch its Xbox 360 as soon as it can and a clear plan has been set for 2007," said a person familiar with the situation, who declined to be named.
"The company has been talking to a wide range of potential sales agents, getting feedback from game testers and experimental users, and doing everything they can with the sole aim of launching Xbox in China as soon as possible," he said.
The launch may be a sign that China's increasingly affluent consumers are starting to form a viable market for the more expensive console games. But how Microsoft prices the Xbox will be key, said Florian Pihs, assistant vice president of market research firm Analysys.
"Microsoft has to choose whether to go for better software protection or if they're going to charge more for the Xbox because there are already some gray imports," he said, adding that most firms launching games expect them to trigger piracy.
"The reason, however, that they are doing it anyway is because Microsoft wants to develop the Chinese software development community ... they already have teams that have software development for Xbox in China," Pihs said.
"Either way it's going to be a tough market for them."