Wrathful 25G
Defeat Zhi.

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This crazy martial arts wanna-be is the first Psycho you will come across, and you'll get a notification that he's around very shortly after reaching Rhonda's Garage (Garden of Peace mission). I recommend either grabbing a bit of food or boosting your health once or twice to make life easier, and you'll also want a medium-long range weapon because he uses a spear which can make close melee combat a bit difficult. The best bet, and the method I used, is to grab the Dragon Punch plans in the nearby dojo and use the motorcycle engine + boxing gloves to craft them prior to starting the fight. Once the fight starts, rotate X and Y to do a dashing punch and then a vertical spin punch when the dash draws you close enough to him. Continue using the Y spin punch until he backs away, or keep rotating the two since the X dash attack has a pretty high chance of staggering him. Overall, he's not too complicated, since he's pretty much just a straight up melee fight (or shoot him a lot fight).

Looking back, there are actually a number of handguns and shotguns laying around, but it's really fun to punch him with spikey fists. Either way, be sure to pick up the key he drops, and the Guan Dao as well.