Shenxiu is most famous in the tradition as the figure who comes out an unfortunate second best in the contest for the patriarchate that, according to the Platform Sutra 六祖壇經, took place shortly before the death of the fifth patriarch, Hongren 弘忍. According to this tale, Hongren announced that he would pass on his mantle to the monk whose verse showed the best grasp of Buddhist truth. All other monks deferred to Shenxiu, who it was assumed would succeed Hongren; Shenxiu, however, was cognizant of his unworthiness for the role, and hesitated greatly before finally inscribing his verse in secret on a monastery wall in the depths of the night. When the verse was finally discovered, Hongren publicly praised it, cancelled a commission for a mural depicting events from the Laṅkâvatāra-sūtra 楞伽經 that had originally been planned for the wall, and ordered all the monks to recite the verse and ponder its significance. In private, however, he castigated Shenxiu for inadequate understanding and urged him to write another verse. Meanwhile, an illiterate layman from the South called Huineng 慧能 was working in the kitchens threshing rice. He heard a monk reciting the verse and asked him where it came from. The monk explained the circumstances to Huineng, and Huineng instantly realized that the verse betrayed an inadequate understanding of the true purport of the Buddha-Dharma, and dictated a riposte in verse, which he then had the monk inscribe upon the same wall. When Hongren was told about the second verse he realized that its author must be his true successor, tracked Huineng down, and had him called to his room in the dead of night, where he expounded to him the Diamond-Cutter Sutra 金剛經. Huineng instantly understood the purport of the sutra and achieved full enlightenment, whereupon Hongren secretly passed on transmission, including his robe and bowl, to him, and sent him away from the monastery and into hiding. The respective verses were (in John McRaeʼs translation): Shenxiu: "The body is the bodhi tree./ The mind is like a bright mirrorʼs stand./ At all times we must strive to polish it/ and must not let dust collect (身是菩提樹 / 心如明鏡台 / 時時勤拂拭 / 莫使有塵埃 );" Huineng: " Bodhi originally has no tree./ The mirror also has no stand./ The Buddha Nature is always clear and pure./ Where is there room for dust? (菩提本無樹 / 明鏡亦無台 / 仏性常淸浄 / 何処有塵埃 )."

Modern research, aided by documents recovered from Dunhuang, has shown this narrative to be entirely unreliable as historical fact. Biographies of the relevant figures show that there was never a time when both Shenxiu and Huineng were present at Hongrenʼs Huangmei monastery, for instance. Moreover, Dunhuang documents show clearly that in the early part of the eighth century Shenxiuʼs group was clearly the mainstream and most vibrant exemplar of Chan in China. This group never referred to themselves as the 'Northern school,' but rather called themselves the 'East Mountain' school, and were recognized as the legitimate heirs of Hongren. The view presented in the Platform Sutra account outlined above dates to sharp attacks upon Shenxiu and his successors, most notably Puji 普寂, launched in 732 and the decade or so following by Shenhui. These attacks which seem clearly to have been motivated by Shenhuiʼs desire to usurp the prestige and favor enjoyed by Shenxiuʼs lineage for the lineage of Huineng, of which he claimed to be the foremost living representative. Shenhui pilloried the so-called 'Northern school' as gradualists with an inferior understanding of the doctrine, and though this characterization of their teachings, as epitomized by the traditional interpretation of Shenxiuʼs verse, was accepted in the tradition for over a thousand years, it can be shown that it is a thoroughgoing misconstrual of their actual teachings.

Thus, while traditional accounts have portrayed the Northern school as a passing blip in the triumphant progress of the true Chan teachings, eclipsed soon and rightfully by the more subtle 'Southern school,' the current scholarly consensus is that the Northern school is in fact the most representative and vital current in Chan in the first half of the eighth century. This more accurate historical picture is typified in the following account of Shenxiuʼs career, which has emerged from scholarly examination of the historical record.

Shenxiu was born around 606 with the surname Li in modern Hunan. His family background seems to have been aristocratic or even royal (note that his surname was the same as that of the ruling Tang house), which may have been a factor in the great favor he enjoyed towards the end of his life under Empress Wu Zetian. In his youth he is supposed to have learned broadly in both indigenous Chinese and Buddhist doctrines, and to have been noted for his charity and humanitarian activities in the disorder attendant upon the fall of the Sui dynasty. He made a round of all the famous mountain centers of Buddhist practice and learning of his day before taking the full precepts at age 20 in Luoyang. In 651 Shenxiu journeyed to Huangmei to study under Hongren. There follows a shadowy period, which McRae has tried to fill with the hypothesis that Shenxiu may be identified with a Weixiu whose biography is found separately in the Song gaoseng zhuan 宋高僧傳. If we accept this hypothesis, Shenxiu may have been banished from court after protesting too vocally against an edict of 662 ordering that Buddhist monks, in violation of their traditional prerogatives, reverence their parents and the emperor exactly as lay people were required to. Sometime between 676 and 679, it seems that a monastery called Dumensi 度門寺 ( 'Monastery of the[Six] Perfections' ) was built for Shenxiu at Jingzhou, and Shenxiu stayed there for the next quarter century. This extended the period for which East Mountain group activities were primarily confined to mountain retreats, as they had been under Hongren at Huangmei during his lifetime, to fully three quarters of a century.

In the latter part of the year 700 Empress Wu Zetian invited Shenxiu to Luoyang. His entry into the city was attended by the greatest pomp. He was borne in a palanquin, flowers were strewn in his path, and the Empress herself greeted him with full prostration. This heralded a period of five years, leading up to Shenxiuʼs death in 706, in which he spent his time traveling between Luoyang and Chang'an, enjoying the status of perhaps the highest-ranking cleric in the land. His death was mourned with lavish state ceremony and expenditure, and such was his status that his biography was included in the official Tang histories, an honor he shares with only two other monks (Yixing and Xuanzang 玄奘).