I have no inside information on this event, but it is very difficult to detect a quiet diesel submarine and the Song-class submarines are quality submarines. Operating in international waters in the vicinity of a US battle group is perfectly normal -- good operational training...I confess this isn't one of those debates in the PLAN that I follow extremely closely, but one of the interesting developments in the last decade or so has been the invention of low-noise, long-duration diesel submarines that offer some of, though by no means all, of the benefits of nuclear power. More intriguingly, the Song-class submarine seems to be built locally, not bought from a foreign power.
The Chinese are building a credible submarine force which will make it very difficult for the US Navy to maintain sea control dominance in or near coastal waters off of China.
Some people are also saying the Chinese managed to sneak up on the US because of the post-Cold War degradation in US anti-sub warfare. Of all the things you were going to cut, I suppose ASW is the easiest to justify with the Soviet Navy rusting on Siberian shores.
This is sounding more and more like it actually happened, and not just made up by the nutjobs at the Washington Times. In any case, it's worth remembering that this is the whole reason that some countries own quality submarines, and train with them very seriously - if you do it right, you surprise the hell out of the other side. All the same, Global Security rates the Song class thusly:
Overall, their shape is like that of Western submarines and their technology is equivalent to the international level of the early 1980s.