In the Spirit Realm, Grandmaster Oogway fights against an adversary named Kai, who has defeated other kung fu masters in the realm and taken their chi, turning them into small jade charms. Oogway willingly gives in and also has his chi stolen, but not before warning Kai that the Dragon Warrior, Po, will stop him. Kai takes this as a challenge to steal the chi from the Dragon Warrior and returns to the mortal realm.
Meanwhile, Master Shifu announces his retirement from teaching to begin his training to master chi and passes the role of teacher to Po. Excited at first, Po discovers that teaching kung fu is not as easy as he expected, as the Furious Five members Tigress, Crane, Mantis, Viper, and Monkey are injured as a result. Po is demoralized as a teacher, which makes him question who he really is and whether he is the Dragon Warrior. In response, Shifu advises Po that instead of trying to be a teacher, he should try to be himself.
Po heads home to his adoptive father, Mr. Ping, at his noodle shop, where a panda named Li Shan breaks Po’s dumpling-eating record. They both soon learn that Li is Po’s biological father and they bond with each other, much to Ping’s jealousy. After introducing Li to Shifu and his friends, the valley is attacked by jade zombies controlled by Kai and resembling past Kung Fu masters, several of them long dead. The team then learns through research that Kai was Oogway’s old friend who fought with him as brothers-in-arms long ago. When Oogway was injured, Kai carried him until they reached a secret village of pandas, who healed Oogway using their chi. The pandas taught Oogway how to give chi, but when the power-hungry Kai decided to drain it from them to increase his power, Oogway defeated him and banished him to the spirit realm. To defeat Kai, Po must learn to master chi himself, which Li offers to teach him by going to a secret panda village. Po, Li and Mr. Ping travel to the village while Shifu and the Furious Five stay behind where Shifu sends Crane and Mantis to track the jade zombies and find Kai. Although Po is eager to learn chi, he first learns the relaxed life of a panda in the village, which he feels grateful to be a part of.