Now that was silly of me... I was thinking about what we're trying to do here, and I realised this should require special permissions for it to work. In other words, I should have jailbroken my DX before attempting this! No problem, this isn't the first time I've done the jaibreak, so a quick update later I'm doing the rootfs image update again, and this time it didn't fail, it's running happily showing message 'Creating image...'.
Maybe this will be useful to others who're trying to help yifanlu with his exciting project.