Here is the story, translated by Victor Mair:
Zhuangzi and Huizi were strolling along the bridge over the Hao River. Zhuangzi said, “The minnows swim about so freely, following the openings wherever they take them. Such is the happiness of fish.”
Huizi said, “You are not a fish, so whence do you know the happiness of fish?”
Zhuangzi said, “You are not I, so whence do you know I don’t know the happiness of fish?”
"I'm not you", said Master Hui, "so I certainly do not know what you do. But you're certainly not a fish, so it is irrefutable that you do not know what the joy of fishes is."
"Let's go back to where we started," said Master Chuang. "When you said, 'How do you know what the joy of fishes is?' you asked me because you already knew that I knew. I know it by strolling over the Hao."
Here is an explanation of this:
When ZZ tells him 'fishes are happy' he lets Hui know that ZZ can operate with with such a concept as 'another's state of mind'. It does not matter if the fishes are actually happy or not. The key issue is can a person even construe of it. That's why in mid-dialogue, the fishes are dropped and conversation turns to whether one person can construe of another person's mind. ZZ is of opinion that when the state of mind is communicated verbally ('fishes are happy'), it lets Hui know what ZZ's state of mind is. That's why when he asks he 'already knows'.
This seems to me that Zz is a naïve realist, who believes "the senses provide us with direct awareness of objects as they really are". If he sees fish moves, then fish really moves. If he sees fish is happy, then fish is really happy.
Is this correct?