I think the larger problem is network bandwidth rather than hard device capacity. Even with high speed Internet connection (> 20 Mbit/sec) it can take a couple of days to download the block chain from scratch.
Yes, that is exactly what Chines miners are worring about. The increasing block size may impact their mining facility and the rate of mining reward.
So China has it's great firewall with very limited bandwith, but they also have the cheapest (and dirtiest!) electricity. The cheap electricity made them the main miners, pushing all competition off the market, and since they all share the same interests, they have the power to keep blocks small.
I see a chicken-egg problem, which limits the growth of Bitcoin.