Two Words: Area Deniability.
China has actually dramatically downsized and modernized their armed forces. They no longer follow Mao's doctrine of People's War (the PLA has never used human-wave as their core doctrinal line). Instead, they have formed a new system that they are structuring their forces around. I can't remember the exact wording, but it was something about small-scale, high-intensity conflicts under extremely technological conditions. This process has been ongoing since they saw what the US did to Iraq in the First Gulf War. While their armed forces may not be nearly as advanced as the United States, they do have certain tools to use.
The big one is what I started this post with: Area Deniability. The Chinese realize that they can't fight the USN in a straight up battle to the death. The PLAN's (People's Liberation Army Navy) short term goal is to build a functional green-water navy with the simple objective of being able to ferry and support an invasion of Taiwan. At this time they don't have an effective blue-water navy to fight the USN.
Instead, they have invested in so many mobile, land-based anti-ship missile systems that the USN can't get close to the Chinese coast without being destroyed. Now, I'm not sure if this will work around the Senkaku islands, but I do know that it works for Taiwan. This would be combined with all the Soviet rust-bucket submarines they have been buying. The point of the subs isn't to actually sink the USN, but to simply slow it down. Anti-submarine warfare is time-consuming and couldn't be neglected or the USN would risk being severely damaged by the attack of the rust-buckets. The whole point being that the USN wouldn't be able to intervene if the Chinese invaded Taiwan.
Now, obviously these are all defensive measures. China lacks the offensive capability to actually strike the Japanese home islands or the US. At least by any conventional means. We currently don't know how advanced they are in terms of cyber warfare. In fact, we don't have any knowledge of anyone's cyber warfare capability.
Anyway, I'm a military history major and I took a few courses (including a high-level seminar) on Chinese strategic thought, so I'm quite well versed on these matters.
This whole situation is a bit disconcerting. As my Chinese military professor has said, the Chinese leadership are being quite immature and the Japanese are being quite imprudent.