Influenza A viruses with the H7 hemagglutinin protein circulate among birds, and some, such as H7N2, H7N3, and H7N7, have been previously found to infect humans. It is not known how the individuals in China acquired the H7N9 virus. Some of the infections have occurred in Shanghai, where a similar virus was found in pigeon samples collected at a marketplace in that city. It is not clear what types of pigeon samples tested positive for the virus, nor is it known whether the virus spread from poultry to pigeons or vice versa. In response the city has begun mass slaughter of poultry to stem further spread of the virus.
Influenza H7N9 virus is typically a low-pathogenicity virus, which means that infection of chickens causes mild respiratory disease, depression, and decrease in egg production. The virus does not have a basic peptide between HA1 and HA2. The presence of a basic peptide in this location allows the viral hemagglutinin glycoprotein to be cleaved by proteases that are present in most cells, enabling the virus to replicate in many organs. Without this basic peptide, the HA is cleaved only by proteases present in the respiratory tract, limiting replication to that site.
According to Brian Kimble on Google+, the nucleotide sequence reveals that the H7N9 human isolate is a reassortant* with 6 RNA segments encoding the internal proteins PB1, PB2, PA, NP, M, and NS derived from H9N2 virus, and the HA and NA from H7N9 virus. The significance of this observation is not clear, because I do not know if H7N9 viruses isolated from birds are also reassortants. One possibility is that reassortment produced a virus that can infect humans. It is known that reassortants of H9N2 viruses with the 2009 pandemic H1N1 strain can transmit via aerosols in ferrets.
An important question is whether this H7N9 virus isolated from humans has pandemic potential. So far there is no evidence for human to human transmission of the virus. There is no vaccine for this subtype of influenza virus, but the virus is susceptible to neuraminidase inhibitors oseltamivir and zanamivir. WHO has released the following statement:
Any animal influenza virus that develops the ability to infect people is a theoretical risk to cause a pandemic. However, whether the influenza A(H7N9) virus could actually cause a pandemic is unknown. Other animal influenza viruses that have been found to occasionally infect people have not gone on to cause a pandemic.
*Because the influenza virus genome occurs as 8 segments of RNA, when multiple viruses infect a single cell, new viruses can be produced with combinations of the parental segments, a process known as reassortment.
Update: Peter Palese notes that the human H7N9 isolates do not have a serine in position 61 (as does the 1918 virus). This change is a human virulence marker for some animal influenza viruses. Brian Kimble notes that the H7N9 isolates possess a L226 equivalent in the HA, which confers human-like receptor binding in other viruses. Human influenza viruses prefer to bind to alpha-2,6 sialic acid receptors, while avian strains bind alpha-2,3 sialic acids. If the human H7N9 viruses can bind alpha-2,6 sialic acid receptors then they are adapted to infect the human upper respiratory tract.