Congrats, you've managed to fall into something that's a mix of exageration and staged videos.
Before anyone says something: Been there with extended family, had dog, tasted good. Yes, I'm half Chinese.
Thing is, there are some weirdoes who decide that they need to torture animals alive. Not just in China but everywhere. I remember the video where some US girls thought it was funny to set fire to an endangered turtle, or all the people worldwide taping explosives into dogs and cats muzzles. The list is long, I won't continue. Liveleak is your friend.
The animals slaughtered at the festival aren't pets, as the really horribly made image I can barely decipher says, but animals raised for exactly one purpose: Human consumption. Just like westerners have chicken/cow/pig farms, in eastern Asia you'll find meat farms for more "exotic" meat, such as dog or snake, in order to name some. Things are just as bad as in farms all over the world, so I don't really see why it's an issue in China but not in the States. Germany managed to pass some laws which at least make animal life in those farms kinda decent.
About the skinning alive mythos: It's been proved that the most famous videos made my "animal rights activists" are all staged and people were paid for it. It's sickening, but hey, I guess for the people it was money. Skinning alive is too much of a hassle, since the animal is going to defend itself. A dead animal is just way easier to skin and take apart.