In April 2003, during a military exercise in the Yellow Sea between North Korea and China's Shandong Province, the vessel suffered a mechanical failure that killed all 70 crew members on board.

[4][better source needed] According to CNN, China was increasing training and exercises of its submarines in the east to carry out a policy of "sea denial" to counter the United States Pacific Fleet.

[5] According to the official Chinese news agency Xinhua, all 70 crew members died when the submarine's diesel engine used up all available oxygen (because it had failed to shut down properly) while the boat was submerged on April 16, 2003.

The submarine, which was commanded by Commodore Cheng Fuming (程福明), had been taking part in naval exercises east of Inner Changshan Islands in the Yellow Sea off the coast of Northeastern China.

[10][11] Another consequence was the creation of negative pressure relative to the outside air, making it extremely difficult to open the outward-swinging hatch for escape, should anyone have remained conscious.

On May 2, 2003, Central Military Commission (CMC) chairman Jiang Zemin said in a condolence message to the families of the dead that "the officers and sailors of 361 remembered their sacred duty entrusted to them by the Party and the people.

"[12] CMC Vice-chairman Guo Boxiong led an inquiry into the incident, which resulted in the dismissal or demotion of five senior PLA Navy officers in June 2003: Navy Commander Shi Yunsheng (replaced by Zhang Dingfa) and Political Commissar Yang Huaiqing; North Sea Fleet Commander Ding Yiping, Political Commissar Chen Xianfeng (陈先锋), and Chief of Staff Xiao Xinnian.