Ip and Leung fight their way outside to meet Jin Shanzhao ” the martial artist and former bandit in the first film ” who comes to their rescue with his own gang. The students master, Hung Chun-nam, arrives to break up the fight. Ip introduces himself, and Hung informs him that before setting up a school, he needs to attend a special fighting ceremony to test his skill. Ip, Leung and Jin are subsequently arrested by Officer Fatso for disturbing the peace but are later released on bail. Hung and Fatso are then shown to be acting as reluctant collectors for the martial arts schools (including Hungs) as part of a protection racket headed by Superintendent Wallace, a corrupt officer in the Hong Kong police. Ip attends the ceremony and defeats his first challengers, and then strikes a draw with the last challenger, Hung. Ip is allowed to keep running his school on the condition that he pay the monthly protection fees, but he declines.
Hung thus has his students loiter in front of the Wing Chun school and harass anyone interested, causing a street brawl between them and Ips disciples. Ip is thus forced to close up and move the school nearer to home. Ip soon confronts Hung and nearly engage in another fight before being interrupted by Hungs family. During this last encounter, Ip saves Hungs son from getting accidentally hit by one of the punches, earning his respect from Hung. Ip leaves, and the next day, Hung invites him to a British boxing match he had helped to set up, quietly coming to terms with him. The boxing competition begins with the various martial arts schools demonstrating their skills. However, the events star boxer, Taylor The Twister Milos, openly insults and attacks the students, causing chaos as the masters try to restore order.
Hung accepts Twisters challenge to a fight so that he can defend his culture. Although Hung has the upper hand at first, he begins to weaken from asthma and is eventually beaten to death. News of Hungs death rapidly spreads throughout the enraged Chinese populace, causing a scandal that spurs Wallace to hold a press conference, where he states that Hungs death was an accident, and Twister announces that he will accept any challenge from the Chinese in order to get rid of his bad reputation. Ip arrives and accepts the challenge. As his wife goes into labor, Ip finishes training and begins his fight with Twister. Ip exchanges blows with the boxer, and seems overwhelmed by the westerner at first.
He receives a sucker punch from Twister after a bell, and is also told he will be disqualified for using kicks due to the judges changing the rules to help Twister cheat the match. When it seems like the end he changes his strategy, and attacks the boxers arms to disable him. This brings the fight to a climactic finish with flashbacks of the Hungs fight with Twister. While the Chinese audience cheers, Wallace is arrested by his superiors for corruption, as Fatso had secretly reported him.
Ip then gives a speech to the audience, stating that despite the differences between their races and their fighting styles, he wishes for everyone to respect each other. Both the Western and Chinese audience then give him a standing ovation while some of the Westerners walk away unhappy at their failure to defeat China. Twister is angry that he lost the match, failed to defeat Chinese kung fu, and gained a bad reputation as a thug and a cheating boxer. Ip goes home and reunites with his family, including his newborn second son, Ip Ching.