In the spirit world, Oogway fights against his former teammate, Kai, a yak spirit warrior, who defeated all the other kung fu masters in the kingdom and took their limbs. Oogway stuck and had his limbs stolen, but not before he warned Kai that the Dragon Warrior would stop him. Kai considers this a challenge to steal the Dragon Warrior's chi and return to earth. Meanwhile, Master Shifu announced his leave from teaching and transferred the role of a teacher to the Dragon Warrior, Po, who realized that teaching kung fu wasn't as easy as expected and injured Furious Five. Po suffers from his failure, but Shifu advises Po that instead of trying to be like him, he should try to be himself. Po returns home and meets a raccoon, Li Shan, whom they both recognize as their long-lost biological father. They quickly bond together, before the jealousy of Mr. Ping, Po's adoptive father.
After introducing Li to Shifu and his friends, Po and Five protected the Valley of Peace from jade zombies Kai created using the chi of the kung fu masters of the past. The team learned that Oogway and Kai used to be brothers in hand and were very close friends. After Oogway was injured in the battle, Kai carried him to a village of pandas, who healed him with their mastery of limbs. The pandas then taught Oogway how to use limbs to help others. However, Kai wants strength for himself and tries to steal the panda's limb, forcing Oogway to banish him to the spirit realm by ending his life. In order to defeat Kai, Po must learn to master chi on his own. Li offers to teach him by taking him to his secret panda village. While Shifu and the Furious Five stayed behind to deal with Kai, Po and Li went to the village, with Mr. Ping on the run to try to drive a wedge between them. Although Po really wants to learn, Li tells him that he must first learn about the comfortable life of a panda in the village.