This is almost certainly written in literary classical Chinese (even if written recently). Basically, in Chinese, words that were once pronounced differently merged in pronunciation in modern Mandarin, though since the writing system is quite divorced from sound, the written forms never changed (at least, not until Simplified Chinese under Mao).

What that means is that a lot of classical Chinese literature has a bit of this problem, in that if you read it aloud, it is tricky to fully comprehend. (This poem/story takes it to an extreme, obviously.) For a long time, up through the early 20th century, it was fairly common for written things to be written in this literary Chinese even if the writer would say their ideas completely differently. A "write as you speak" movement has largely changed that: in modern written Mandarin, many words are two or three syllables long, and written with two or three characters. Etymologically, the words may have derived from compounding monosyllabic words, but in the modern spoken (and now also written) language, the sub-word syllables are simply no longer words in any meaningful sense.

(An analogy on a much smaller scale in English: many dialects of English merge /ɪ/ and /ɛ/ before a nasal sound, so that "pin" and "pen" sound identical. Speakers of those dialects will often say "straight pin" or "ink pen" (or "pig pen" or "cow pen") to distinguish which kind of pin/pen they mean; they may or may not make the distinction in writing. So the writing is unambiguous, the speaking is unambiguous, but reading a written thing is ambiguous. When it's just one or two words it's no big deal, but imagine that nearly every word suffered from that problem....)

EDIT: It turns out there's a Wikipedia page on the poem (naturally, should've checked that first). A lot of this is covered there: http://en.wikipedia.org/wiki/Lion-Eating_Poet_in_the_Stone_D...