Now the body of the serving-boy whom Liu Hong had killed drifted off downstream;

卻說 is the storyteller moving the camera: now, to take up this thread. The serving-boy's body drifts off downstream and out of the story. No rescue, no dragon, and no name.

but the body of Chen Guangrui alone sank to the river-bed and lay still.

One body floats away; the other sinks and stays put. The stillness is the tell — corpses do not behave like that, and the reader is meant to notice before the yaksha does.

A yaksha on patrol at the mouth of the Hong River saw it and sped to report it to the Dragon Palace, where the Dragon King had just taken his hall; the yaksha reported:

A 巡海夜叉 is a yaksha on water patrol. A yaksha is a fierce guardian spirit that Buddhism took over from older Indian religion; here one has been reduced to a beat officer. 升殿, to ascend the hall of audience, is what an emperor does at dawn. The Dragon King does it too, on the same schedule, underwater.

'At the mouth of the Hong River, some unknown person has beaten a scholar to death and flung the body into the deep.'

士子, a scholar, with 子 in its full sense, zǐ. 甚人, what person, takes 甚 as shèn — the older written question word where later Chinese writes 什.

The Dragon King had the body carried in and set before him, and looking it over closely said:

擡來, carried in: two bearers lifting between them. The Dragon King inspects the body himself, which is the first sign that this is not routine.

'This is the very man who saved me — how comes he to be murdered?'

And there it is. The fish remembers. The Dragon King is looking down at the man who bought him out of a fishmonger's hand a few days ago.

As the saying goes, 'Kindness should be requited with kindness.'

恩將恩報, kindness repaid with kindness, where 將 is the instrumental jiāng, with. The version most Chinese speakers actually know is the sour inversion, 恩將仇報, repaying kindness with enmity — so hearing the straight form here has a slight ring of a proverb being restored to factory settings.

'Today I must save his life, to repay the kindness he did me before.'

須索, must, am bound to. Obligation rather than choice: the debt is being treated as legally binding.

He at once wrote out a dispatch and sent a yaksha straight to the City God and Earth God of Hongzhou to deliver it,

A 牒文 is an official dispatch, the paperwork one government office sends another — which is exactly what this is. The 城隍, City God, and 土地, Earth God, are the local administration of the invisible world: the City God runs a city much as a magistrate does, the Earth God a single patch of ground. 差, to send a subordinate on an errand, is chāi.

to fetch the scholar's soul and save his life.

魂魄 is the soul in two parts: 魂, the cloud-soul that rises and travels on, and 魄, the white-soul tied to the body and the grave. English has one word where Chinese has a partnership.

The City God and Earth God then bade their little demons hand Chen Guangrui's soul over to the yaksha to take away.

小鬼, little ghosts, are the junior clerks of the underworld offices, the ones who do the fetching and carrying. The soul is handed over the way a file is: department to department, against a receipt.

The yaksha bore the soul to the Crystal Palace and reported to the Dragon King.

水晶宮, the Crystal Palace, is where a Dragon King lives — glass-clear halls beneath the water, standard equipment throughout Chinese story. 稟見, to report to a superior, is what the yaksha does before anything else happens.