But it doesn't. It totally fails to meaningfully define "understanding".
It defines it just fine. Understanding means grasping what a symbol refers to and what it represents conceptually, rather than just engaging in symbolic manipulation itself.
Just imagine a perfect rule book that already has a translation from one language into the other for every imaginable sentence, some native speakers just have written any possible combination down. You could 'translate' by just visually picking without having any idea of what's being said. They understand, you do not.
ok, so you define something that isn't understanding (symbolic manipulation, use of a magic rule book).
But where do you define what it is? "grasping what a symbol refers to" is another way of saying "understand" - it doesn't define what it means to "grasp".
Searle is a materialist, pretty hardcore one at that. What he wanted to show with the Chinese room is that simulation of intelligence and intelligence are not the same thing, that a machine, or even a human for that matter, can perform symbol manipulation without having any internal understanding of the thing they perform.
It's an argument against functionalism (i.e. that a digital computer 'thinks' the same way as a human merely because it performs the same tasks), not an argument for dualism. (that mind and matter are ontologically dinstinct substances)