The update emerged from a translation of the latest entry on the Japanese Street Fighter IV blog, where project manager Natsumi Shiozawa issued details on the character's appearance in the upcoming fighter.
The roots of the Sheng Long gag stretch back to 1992, when the character was introduced in EGM's April issue as a secret boss in Capcom's Street Fighter II. It ranks among the most infamous April Fools gag in the history of gaming, sparking a tradition that would bring woe to game journalists for years to come.
According to EGM, if the player could complete the game untouched while playing as Ryu, Sheng Long would replace M. Bison as the final boss in Street Fighter II. In his post today, Shiozawa referenced similar conditions to attain Sheng Long within Street Fighter IV.
The whole supposed existence of Sheng Long ties back to an old mistranslated victory quote, in which Ryu would proclaim "You must defeat Sheng Long to stand a chance" instead of "You must defeat my Dragon Punch to stand a chance" after winning a battle.