Excuse me one moment, going to do this write up method*.
Okay. Smith, who prefers his pipe to booze (he is described as "smoking hard") explains a few things. They aren't in hiding because Fu-Manchu would inevitably find them**. The woman who Petrie found so striking (and vice versa) "is either Fu-Manchu's daughter, his wife, or his slave." Good information there Smith. Finally he reveals that Sir Crichton "...died of the Zayat Kiss. Ask me what that is and I reply 'I do not know.'" Smith goes on to detail his ignorance for another couple of paragraphs, revealing that from the clues*** he thinks a creature was lowered down chimney, then withdrawn the same way. Probably by a dacoit, the infamous Indian bandits. Fu-Manchu, it seems, is pan-Asian in his personnel.
They go to bed, setting up a camp bed for Smith in the same room. Shortly after two in the morning a dacoit (or so Petrie presumes) enters the room and opens a box. Smith reveals it with his torch:
"It was an insect, full six inches long, and of a vivid, venomous, red color! It had something of the appearance of a great ant, with its long, quivering antennae and its febrile, horrible vitality; but it was proportionately longer of body and smaller of head, and had numberless rapidly moving legs. In short, it was a giant centipede, apparently of the scolopendra group, but of a form quite new to me."
By B. Navez - Own work (own photographic work), CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=810622
This, of course, is our first experience of the modus operandi of Dr Fu-Manchu. Firstly he hides behind secrecy and mystery, which creates fear of it's own, and when we penetrate through the veil we discover a disgusting and dangerous poisonous insect, hard to defend against. He is as terrifying when known as unknown. This, amongst other attributes, is one of the things that makes Fu-Manchu a great villain; layers of mystery and horror.
* Method acting, popular in American film and theatre, is where one accesses ones own memories and sensations to enhance a performance; in order to portray a runner one might go on some runs, and to act like a comedian one might do some stand up. A peg is a measure of strong liquor in India but Petrie uses the word informally (I assume), so anyway I'm not making a precise measure.
** Although I do wonder why Smith is making it quite so easy for him.
*** Or 'clews' as the word is charmingly spelt.