That's a picture of it doing weapons integration tests with the PL12/SD10.
With a dual rack, the JF17 should be able to loft 6 PL12s and a pair of PL5s as well as a centerline drop tank. But the PLAAF rarely if ever flies with airshow loadouts like that.
As for why they are not buying it, well the PLAAF is trying to cut down on the number of types they are operating, and the JF17 is really struggling to find a place in the new order of battle.
At the top end, you have the J10 and J11 at present, with the J20 coming online in the future, so the J10 and J11 would drop down to the medium level.
The low-end air policing duties can easily be undertaken by an armed version of whatever future trainer the PLAAF settles on, be it the L15, or an evolved JL9 version.
But personally, I am starting to get the feeling that part of the rational for continuing with the J11s is that they will take over a lot of the air policing duties.
Because of their great range, you will need far fewer aircraft and air bases to be able to cover the vast Chinese hinterland - places that have very little of value for hostile air power to attack, and also situated near neighbours without the reason or means to mount a serious air threat.
This will allow the PLAAF to make the numerical cuts they are planning to make but not leave holes in China's air defense. And if it really came down to it, the J11s can be re-deployed much quicker and easier than shorter-ranged fighters like the JF17.