The film opens with Tai Lung (Ian McShane), the main antagonist from the first Kung Fu Panda film, returning from the Spirit Realm and destroying a mine operated by a herd of rams. He boasts that nobody can stop him now, not even the Dragon Warrior. In the Valley of Peace, Mr. Ping and Li Shan are running their restaurant together, but they are worried about where Po is. Po is fighting a flying stingray by the lake and manages to save three piglets before returning to the Valley.
At the Jade Palace, Shifu informs Po that he must train a new Dragon Warrior so that he can become the Spiritual Leader of the Valley of Peace. Po watches several candidates show off their skills but doesn’t want to pick anybody other than himself. Shifu then has Po meditate so that he can get ready to find a successor. While escorting Zhen to prison after she is caught trying to steal something from the Hall of Heroes, Po learns that Tai Lung’s return is actually being masqueraded by The Chameleon. Zhen convinces Po to let her free so that she can help him track down The Chameleon.
Word spreads throughout China about The Chameleon’s return, causing everyone to grow fearful. Ping and Li both try not to worry for Po until they both break down and admit they are scared for his life. They set out on their own adventure to help their son. In Juniper City, crime bosses discuss their frustration in having to give a large portion of their earnings to The Chameleon before learning that she is among them in disguise. She shapeshifts into an elephant and pushes one of the bosses down the stairs before upping the percentage of their earnings as punishment for disrespecting her.
Po and Zhen make it close to Juniper City but have to cross a large lake first. They enter a tavern called Happy Bunny Tavern but have trouble leaving without paying for all the food Zhen ordered after she cheated at mahjong with its patrons. This causes Granny Boar, its manager, to send thugs after them, leading them into a dangerous situation since the tavern is teetering over the edge of a cliff. They fight their way through the crooks before falling out of the tavern window onto a boat operated by Captain Fish who lives inside his seagull mom’s mouth. They proceed to take them safely into Juniper City where they discover Zhen is wanted as a criminal.**
Po gets arrested along with Zhen at The Den, an underground part of Juniper City where she used to live before being kicked out by its leader Han (Ke Huy Quan). They are able to hide there briefly while Po continues trying to teach Zhen how to do good before Han kicks them back out again due to her past actions as a thief.**
Po and Zhen make their way toward The Chameleon’s palace while trying not to be detected by her guards or traps along the way. A cage drops onto Po during one encounter which he tries getting Zhen’s help propping up with Oogway’s Staff only for her reveal herself as The Chameleon’s apprentice who tricked him into giving her it earlier in order for The Chameleon (disguised as Zhen)to throw him off a bridge when he least expects it.**
Ping and Li arrive just in time saving him from certain death after taking their journey all across China following news about The Chameleon’s return.**
The Chameleon uses Oogway’s Staff opened portal into Spirit Realm summoning villains like Lord Shen and General Kai while Tai Lung expresses surprise at seeing her possess it.**
Po runs across bridge trying getting back inside palace only for Zhen trying stopping him from getting killed in process leading them having brief fight until she hugging him expressing remorse deceiving him they reconcile then go with Ping & Li convincing Han & everyone else at Den joining forces against The Chameleon.
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