With his poor form last season, and the arrival of defensive pair Danny Mills and Ben Thatcher in the summer, the Chinese player's days with City looked to be numbered.
But he has proved his worth this season, and his versatility, with a number of good performances.
"There was a period about six months ago towards the end of last season when it looked as if his mind was not here," Keegan told the official club website.
"But since his wife has come here with the baby - as she had been in China - he has been a different guy. It is very different for players when their families are not here with them.
"The truth is that he has not been able to nail down a first-team place consistently but he is an excellent player and maybe the best is yet to come."
"I like Jihai Sun," admitted the City boss, who revealed his performance against Arsenal last weekend was crucial in his decision.
"He is good to have around the place and he can play anywhere. He adapted to the left-back role against Arsenal. I thought because he was playing in a strange position he was our best player.
"I had the choice of playing Stephen Jordan there but, as it was Arsenal, Jihai Sun's experience won the day and I was glad I was proved to be right. You couldn't tell he was a right footed player."
The defender has had he critics since his arrival from home-club Dalian Shide in February 2002, but Keegan believes he has now come to terms with the English game.
He added: "I think he has really settled into English football. It has taken him a while but I think he is settled now.
"I tried him in central midfield in the reserves but that didn't go too well. Had it have done then I would say he could play anywhere in the back and midfield."