This thing about "penis envy" has been around for a long, long time. Typically, it happens when a little girl sees a naked father or male sibling and thinks, "I don't have one of those. Something is wrong with me, and I've been left out!", without understanding the nature and physiology of mammal sexuality.
I pity the life the "niecew" will now have to live - leaving one world but not quite arriving at the other. But the blame belongs to the parent(s).