Yes, it means that space-time itself is being "created".
And yes, it APPERARS to be "counter-intuitive", "unphysical", etc. I could add more adjectives, such as "weird", "bizarre", and so on.
As I was trying to explain in my lecture right at the start of SP-2010, our so-called "intuition" is nothing but the hard-wiring in our brains that enables us to deal with, and manipulate, everyday objects and phenomena in what I called the macroscopic "world of middle dimensions". That doesn't mean that one UNDERSTANDS that world, either---to do that, you need careful experimentation and mathematical analysis, leading to the quantitative science called Newtonian or classical mechanics.
Incidentally, I don't see why the inverse square law of gravitation is any more "physically understandable" than, say, the general relativistic idea that matter causes the space-time around it to get curved or "warped". They are both statements that require mathematics to express them, although the first might be expressed rather more easily than the second (in the sense that the mathematics required is simpler). That does NOT make it any more "intutive" or "physical" than the second.
So you must get rid of this notion that everything has a simple, MECHANISTIC, explanation. You must also learn to distinguish between a "mechanistic" explanation and a PHYSICAL explanation. The equations of electromagnetism do NOT have any exact mechanical analogues, and yet electric and magnetic fields are just as physical and real as anything else.
As I repeatedly emphasize, physics has become a reasonably mature subject over the past 400 years or so. This means that its explanations have become both deep and refined to such an extent that they can only be expressed precisely in mathematical language. That's how nature happens to be, and (remarkably enough) Galileo himself recognized this very early in the day.
V. Balakrishnan