This is not a happy development, really. Another example of the intelligence community not quite being able to keep up with its duties. Not really a suprise: no matter how good the intelligence community is, they'll never be able to always know what's going on everywhere. Less attention has likely been paid to China since September 2001, but missing something as big as the development of an entirely new submarine is not a good sign.
It is beginning to look more and more likely that the US will end up in a conflict with China at some point. This will be a direct result of our 'don't actively take sides' policy with Taiwan. We don't want to make China mad by recognizing Taiwan, but won't take China's side either. We support Taiwan militarily, but basically say that it belongs to China. (Technically, Taiwan has never declared independence, so this is correct, but as far as I know the communist government of China has never had control of Taiwan, so it could not be a 'breakaway province' as they claim.)
It's a mess, and there isn't any really neat way to get out of it.