When the Handsome Monkey King heard this, his heart filled with joy. 'So an immortal has been hiding here all along!' he cried.

藏 is cáng, to hide. He has heard Daoist talk, so he concludes there must be a Daoist producing it — sound reasoning, and completely wrong. Nine years of disappointment have made him quick to hope.

He sprang inside at once and, looking closely, saw that it was a woodcutter, swinging his axe to cut firewood.

樵子 is a woodcutter (子 the neutral suffix), and he is 舉斧砍柴, swinging an axe at firewood (砍 kǎn). The reality is a good deal humbler than the hope. The novel lets that sit for a moment before anybody speaks.

Just look at how he was turned out:

打扮 (dǎ bàn) is somebody's get-up, how they are turned out, and 但看他 is the storyteller's cue again. What follows is a 賦 about a poor man's clothes — which tells you at once how seriously the novel takes him.

On his head he wore a bamboo rain-hat, the sheath freshly shed by a new bamboo shoot.

The clothing-賦 works one idea all the way down: every garment is traced back to the living thing it came from. The 箬笠 (ruò lì) is a broad bamboo-leaf rain hat, and the poem calls it the sheath a new bamboo shoot has just shrugged off (籜 tuò). Not "he wore a hat," but "he wore what the bamboo took off."

On his body he wore a cloth coat, the gauze spun out of cotton thread.

The cloth coat is "gauze twisted out of cotton" (木綿 cotton, 撚 niǎn to twist into thread, 紗 a light weave). Second garment, same move: back to the plant.

At his waist was tied a looped sash, the silk spat from the mouth of an old silkworm.

The looped sash (環絛, 絛 tāo, a woven cord) is "silk spat from the mouth of an old silkworm" — the 維基文庫 reading 口吐之絲, against 口吞, "swallowed," in some editions. Third garment, back to the animal. Nothing this man wears is more than one step from where it grew.

On his feet he trod straw sandals, woven from dried sedge.

The straw sandals (草履, the 維基文庫 reading against 屮履 elsewhere) are worked out of dried sedge (莎 suō, sedge grass; 槎 chá, to hew into shape). The line ends on 爽 (shuǎng) where the pattern calls for a material noun to match 籜, 紗 and 絲 above. Both the 維基文庫 and 識典古籍 texts transmit 爽, and we keep it rather than tidy it away.

In his hand he held a pure-steel axe; over his shoulder, a coil of hemp rope.

衠鋼斧 is an axe of unalloyed steel (衠 zhūn, an old word for "genuine, pure") — the one good tool he owns. In 擔挽火麻繩, shouldering a coil of hemp rope, 擔 is the verb dān, first tone, "to carry on the shoulder," as against the noun dàn, "a load," in his own song a moment ago.

At pulling down pines and splitting dead trees — who could match this woodcutter?

扳 (bān) is to pull down and 劈 (pī) to split. 爭似此樵能 uses 爭 for 怎, "how" — "how could anyone match this woodcutter?" (似 sì, to compare with). A poem that has spent eight lines cataloguing a man's poverty ends by admiring him. That is the note the whole encounter is pitched in.

The Monkey King came up close and called out: 'Venerable immortal, your disciple salutes you!'

起手 is raising the hands in salute, and 弟子 is "your disciple" (子 in full tone zǐ). He has not asked a single question. He calls the man 老神仙, "venerable immortal," and offers himself as a student on the spot.

The woodcutter hastily dropped his axe, turned, and returned the courtesy: 'I don't deserve that, I don't deserve that!

不當人，不當人 is a set phrase of flustered modesty, roughly "I'm not worthy, I'm not worthy" (當 dāng, to deserve, to bear a title). He drops the axe first. Being taken for a god is embarrassing when you are halfway up a hill cutting sticks.

I'm a clumsy fellow who can't even feed and clothe himself — how should I dare bear the two words 'immortal'?'

拙漢 is "a clumsy fellow," self-deprecating (拙 zhuō), and 衣食不全 is not having enough to eat or wear. Note the grounds of his refusal. Not "I have no powers," but "I am poor." He measures the title against his standard of living, which is funny and a little sad at once.

The Monkey King said: 'If you're no immortal, how is it you speak an immortal's words?'

The monkey argues backward from the song to the singer: if the words are an immortal's, the mouth must be too. It is a reasonable inference and the wrong one, and he will not let go of it for another four exchanges. (不是 takes 不 as bú before the falling tone of 是.)

The woodcutter said: 'What immortal's words did I speak?'

The woodcutter is honestly baffled — "what immortal's words?" He has been reciting these lines for years without hearing anything remarkable in them, which is the surest sign the song is not his own.

The Monkey King said: 'When I came just now to the edge of the wood, I heard you sing:

才 (cái) is "just now," and 只聽的 uses 的 where standard writing has 得. He is about to produce his evidence, word for word.

'Wherever I meet a man, if not an immortal then a Daoist, sitting in stillness expounding the Yellow Court.'

He quotes the song's closing line straight back at the singer as proof. To him it is plain enough: anybody who sits about expounding the Yellow Court is an adept.

The Yellow Court is the true word of the Dao and its power — if you're no immortal, then what are you?'

The monkey has his facts straight even as he gets his conclusion wrong: 道德真言 really is "the true word of the Way and its power," and the Huangting jing really is a core Daoist meditation scripture. 非神仙而何, "if not an immortal, then what?" He thinks he has won the argument.

The woodcutter laughed: 'I'll not deceive you — this lyric is called Mǎn tíng fāng, and an immortal taught it to me.

實不瞞你說 is "I'll be straight with you" (瞞 mán, to conceal). Then the deflation. The piece is a 詞, a lyric written to a fixed tune, and the tune is called 滿庭芳, "Fragrance Filling the Courtyard." Naming the tune is the giveaway: it is not his composition. It is a standard.

That immortal's home neighbours mine.

教 here is jiāo, "to teach" — worth noticing, since the same character has been jiào, "to order, to cause," in earlier passages. And the real news is dropped in passing: 舍下相鄰, the immortal lives next door (舍 shè, a dwelling). The monkey has crossed two oceans and spent a decade searching. This man's neighbour is the thing he was looking for.

Seeing how my household labours and how I'm troubled day to day, he taught me that when vexation comes I should just recite this lyric —

The immortal noticed his neighbour's hard 家事, household toil, and his daily 煩惱, vexation, and gave him something for it: recite this when the worry comes. Not a scripture, not a technique — a song to say to yourself. That is the whole extent of the supernatural in this scene, and it is oddly moving.

first, to ease the mind; second, to dispel care. I'd been fretting a little over my hardships, and so I was reciting it — I never expected you to overhear.'

一則散心，二則解困 — first it clears the head, second it lifts the weariness. He was reciting it because he had been brooding on his hardships, and 不期被你聽了, he never expected anyone to hear (不期, unexpectedly; 被 the passive marker). The misunderstanding is now fully on the table — and it is about to take the monkey exactly where he needs to go.