I went there two years ago in September. I took 2 phones there, a little Motorola that works in all the USA and Europe (but as it turns out, not China) an unlocked Iphone 2g. (I left my then-new Iphone 3g at home - not unlocked, higher theft value). I kept it on my person at all times, and Customs didn't ask about it when I entered the country; it was in my pocket.
It worked fine; I bought a 300 MB data-enabled SIM which lasted me 10 days (remember, Edge speeds). As a phone it worked fine, and when I got text messages in Chinese they were either spam, or sent to my Chinese friends from their family. I didn't try to get texts in English but I heard they work too.
With the data plan, I could pull up Google maps, check email, etc. Google maps helps a bit for finding your way, if you know about where you are and where you want to go, but without a GPS it's only partly useful.
I had to find a bilingual person who knew what I was talking about to make sure to get the right SIM card (with data) - mine was China Telecom. And I had to set my DNS and Edge settings correctly, I had done my homework and knew the correct settings (but the cheerful girl at the corner mobile phone stand knew the settings too, and it was the one thing in English on the SIM packaging).
My last day there, I tried to exhaust the data plan by emailing pictures from my high-speed train ride, but failed. I used 272 MB total in 10 days - mostly email and checking mainstream US sites for news, some map lookup, etc.
Things may have changed since then, especially around GPS and the Great Firewall of China (thus access to some US sites). If you're paranoid, set up a new Gmail account and use only it on the Iphone - assume it's compromised from day one, and don't do anything on that account you wouldn't want a lumbering but occasionally paranoid foreign communist government to know about. Commercial or personal stuff is fine, just stay away from politics.