The whole newspaper website is blocked in China, unsurprisingly (oh you silly censors, I still managed to get past your ramparts). Apparently the original story has also been deleted from Xinhua's website--however, it can still be accessed through Google's cached pages*. How embarrassing for Xinhua.
It seems to me, this problem could arise from two conditions: (1) Pressure on Chinese news agencies to maintain quotas for reporting good vs bad news, and (2) state run agencies' (such as Xinhua) tendency to suffer from nepotistic hiring practices. The result: Xinhua ends up with a surplus of untalented hacks looking for positive, whimsical stories with which to entertain the masses. The result is that national news agencies in China often contain a lot of tabloid journalism. I've seen plenty such stories in the news papers here--my girlfriend likes to point out odd stories to me sometimes--although this one takes the cake for being the most bizarre example. I suppose the fact that the reported subject matter is foreign gave the reporter the feeling he/she could take more license in the fabrication of the story.
Local or specialist papers (the Local, for example) can probably sympathize with the search for entertaining, oddball subject matter to report... but they're still more accountable for the accuracy of the stories they print, and less accountable for making sure their stories do not reflect on negative trends/events or negative perceptions of their home governments.
*Read the comments section of the article itself for more specific details (as well as list of Chinese newspapers that printed this article).