Lived in Yunnan for over a decade, primarily as a vegetarian. Mushrooms there are indeed many and varied and quite tasty. Many poisonings annually but the government are pretty good at helping people to ID with warning posters. Personally ate many mushrooms that looked like this and never had hallucinations. Did have some others which made me feel a little ill, however. I suspect locals are unduly relaxed about types science would avoid due to hepatoxicity.

While occasionally FOAFs would get hallucinogenic effects from dining, I don't recall explicitly hearing of anyone seeing little people, or hearing the term he details in this writing. As such, I wonder where this guy gets his info from. Certainly, most Yunnanese would describe these mushrooms as 牛肝菌 ("bolete") and more specific Chinese common names for similar reddish species would include 桃红牛肝菌 ("peach-colored bolete"). As a general type, they are very common in markets across much of Yunnan.

Given the claims, the clearly infrequent effects, and the personal experience I can trust, I would conclude with three theories: perhaps either the compounds are rapidly degraded when non-fresh, safely broken down when cooking (traditionally these mushrooms are cut thinly before sauteeing or boiling in hotpot), or there are one or two "look alike" species which are more rarely found and contain additional compounds which are responsible for the occasional effects.

According to Wikipedia, the Yunnan mushrooms indeed have their hallucinogens broken down after cooking: https://en.wikipedia.org/wiki/Hallucinogenic_bolete_mushroom

Good guess!

Although, the local hospital records imply that hallucinations can last for days or even months, so uh, probably not a great idea to go looking for them...