Symbolism, Imagery, Allegory
The creepy house of prostitution run by the mysterious Madame Zhou is scary precisely because it's so enigmatic. And in that way it mirrors Lin's experience throughout the novel, where he doesn't know whom he can trust, who is pulling strings and organizing everything, and who is watching without being seen.
At first glance the place doesn't seem so bad with a "smell of incense and flowers" and "lily-shaped lamps of fluted glass" (2.13.113). However, just as things seem nice and fragrant with Khaderbhai and Karla in the beginning, things sour as Lin finds out more.
Karla tells Lin:
"[Madame Zhou] can move around the building without being seen because there's a lot of hidden passageways and staircases. She can look in on most of the rooms through two-way mirrors or metal air vents. She likes to watch. Sometimes she talks to people through a screen. You can't see her, but she can see you." (2.13.78)
Just as Lin isn't able to tell who has him thrown into jail, or why Karla, Abdullah, and Nazeer all seem to be in the right places at the right times to "run into," the patrons of Madame Zhou don't know what's going on behind the scenes in the palace. The mysterious house hides who's really in charge, just as Khaderbhai's network and staged coincidences hide his true intentions with Lin.