This is a fragment of a much larger painting (another fragment is in the Musée Guimet, Paris) showing Shakyamuni preaching on the Vulture Peak. It shows the monk Liu Sahe and the construction of the famous Buddha image in several scenes in the background.
Liu Sahe lived in the fifth century and predicted that a statue would appear on Mount Yugu and its completeness would signify peace or turmoil in the world. In AD 519 a headless statue appeared, and later the missing head was found.
The story of Liu Sahe was popular in Dunhuang, and was also shown on wall paintings there. The monk is shown next to a partially destroyed image of the Buddha, whose outstretched right hand is clearly visible. In the small scenes behind Liu Sahe you can see a statue of the Buddha being constructed which has its hand in the same position. The left hand holds the Buddha's robe. It has been shown that this posture - which is otherwise rare - is used specifically to show miraculous Buddhist images.